Advanced: Evaluation of mutually exclusive projects A college has an area of unused space available within its main entrance hall. The administrator has proposed that this should be used to accommodate a kiosk selling books, stationery and other student requirements. The hall is well lit and adequately heated and no additional cost would be involved for these services.

No other useful purpose is foreseen for the area. However, future major re-development is planned at the college so the facility is only likely to be available for five years A suitable lock-up kiosk together with fittings would cost £2" 000 to build. Cost of capital to the college is 10% per annum.

A survey of sales potential and estimated costs has produced the following disappointing annual figures:

During discussion on supply prices, a local whole-saler has offered, in return for a five-year tenancy, to pay half of the cost of building the kiosk and an annual rent of £4000 inclusive of lighting and heating.
You are required to:

(a) review critically the administrator's figures; (5 marks)

(b) evaluate the two proposed methods of operating the kiosk;
(15 marks)

(c) recommend a course of action you think should be taken using the data established in part

(b) and stating any assumptions you make

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Total sales Cost of sales Staff salaries Interest on capital (000) (000) (000) 100 80 13 8224 Depreciation of kiosk Share of existing college overheads: Building repairs Heat and light Administration Estimated annual loss 311 5 104 4