P7.6 An entrepreneur is contemplating purchasing one of two similar competitive motels and has asked for your advice. Present revenue of each motel is $450,000 per year. Jack’s motel has annual variable costs of 50 percent of sales revenue and fixed costs of $200,000; Jock’s motel has annual variable costs of 60 percent of sales revenue and fixed costs of

$155,000. The entrepreneur thinks that, if he purchased Jack’s motel, he could save $10,000 a year on interest expense (a fixed cost). Alternatively, if he purchased Jock’s motel, he could improve staff scheduling to the point that the wage saving would reduce total variable cost to 55 percent. In the case of either purchase, he thinks that sales revenue can be increased by 20 percent a year. Calculate the present net income of each motel, then, given these assumptions, advise the entrepreneur which one he should buy, including any cautionary comments.