The owners of a cocktail bar have the following annual income statement information:

The owners are considering new furnishings for the bar at an estimated cost of $20,000 using their own funds. They anticipate the new furnishings will bring in additional customers, and their sales revenue will increase by 10% above their current level. The new furnishings are estimated to have a five-year life with no residual value. The new furnishings will be depreciated using straight-line depreciation.
To provide service to the additional customers, more staff would be hired at an additional cost of $125 per week. Other operating costs will increase by $1,400 per year. There will be no increase to direct (fixed) charges other than depreciation expense. The income tax rate will remain at 25%. The owners will go ahead with the project only if the return on their $20,000 investment is 15% per year or more in the first year.

a. Should they make the $20,000 investment in new furnishings?

b. If they had the alternative of using only $10,000 of their own funds and borrowing the other $10,000 at 10% interest, would the decision change?LO1

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Annual sales revenue $210,000 Cost of sales (30% of sales revenue) 63,000 Payroll expense 50,000 Other operating expenses 20,000 Direct expenses (charges including depreciation) 40,000