The cafeteria in Haekon Towers, an office building in downtown Oslo,
is open 250 days a year. It offers typical cafeteria-line service. At the noon meal
(open to the public), serving-line facilities can accommodate 200 people per hour
for the two-hour serving period. The average customer has a 30-minute lunch
period. Serving facilities are unable to handle the overflow of noon-hour customers
with the result that, each day, 20 dissatisfied customers who do not wish
to stand in line choose to eat elsewhere. Projected over a year, this results in a
considerable loss to the cafeteria.
To tap this excess demand, the cafeteria is considering two alternatives: (a)
installing two vending machines, at a cost of NK25,000 apiece (NK means
Norwegian kroner), or (b) completely revamping present serving-line facilities
with new equipment, at a cost of NK150,000. The vending machines and

serving-line equipment have a useful life of ten years and will be amortized on a
straight-line basis. The minimum desired rate of return for the cafeteria is 10 percent.
The average sale is NK15, with a contribution margin of 30 percent. This
will remain the same if new serving-line facilities are installed.
Data for alternative (a) vending machines are as follows:

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Service cost per year is NK2,000; salvage value of each machine at the end of ten years is NK5,000. Contribution margin is 20 percent. It is estimated that 60 percent of the dissatisfied customers will use the vending machines and spend an average of NK15. The estimated salvage value of the present equip- ment will net NK20,000 at the end of the ten-year period. Data for alternative (b) new serving-line facilities are as follows: Yearly salary for an extra part-time cashier is NK8,000; salvage value of old equipment is NK50,000; salvage value of new equipment, at the end of ten years, is NK50,000; cost of dismantling old equipment is NK5,000. It is estimated that all the previously dissatisfied customers will use the new facilities. All other costs are the same under both alternatives and need not be considered. Using the net-present-value model, which is the better alternative?