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newly opened stores would generate revenues of $25
million per year, while mature stores would generate
$35 million. Additionally, Mr. Conklin assumed that
SWI's gross profit margin would grow by 0.3 percent each
year, reaching an "industry norm" of 13 percent of sales
by 1999 to reflect improved management and economies of
scale.
Mr. Conklin next reduced SWI's estimated total sales
by operating, pre-opening, capital, interest, tax, and
other expenses to arrive at a projected net income for
each year. In calculating the amount of such expenses,
Mr. Conklin assumed that beginning operating expenses for
each store would equal 8.8 percent of net sales, and that
this figure would decrease by 0.1 percent per year over a
9-year period (beginning the second year) to reach a
minimum ratio of 8.0 percent. He also assumed that
each new store opening required capital expenditures of
$1 million and pre-opening expenditures of $400,000.
Mr. Conklin next estimated SWI's "debt-free residual
cash flow" for each year. He calculated this figure by
reducing net income by "incremental working capital",
which he described as the amount of working capital
required to support accounts receivables and inventory.
Mr. Conklin assumed that this figure for each year would
equal 7 percent of the increase in sales over the
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