Brandon's sales manager feels that the company needs to diversify its operations. He has suggested that an opening be cut in the wall between the pizza shop and the vacant space and that video games be placed in the space, along with a small snack bar. Costs for remodelling and for the snack bar facilities would be $290,000. The games would be leased from a large distributor of such equipment. The distributor has stated that based on the use of game centers elsewhere, Jaco could expect about 26,000 people to use the center each year and to spend an average of $5 each on the machines. In addition it is estimated that the snack bar would provide a net cash inflow of $15,000 per year. An investment of $4000 in working capital would be needed to provide change funds and to provide inventory for the snack bar. This working capital investment would be released at the end of the lease term. The snack bar equipment would have a salvage value of about $12,000 in 15 years.

 

Brandon management is unsure which alternative to select and has asked you to help in making a decision. You have gathered the following information relating to added costs that would be incurred each year under the 2 alternatives:

IF you expand the pizza shop                 

Rent building space       $18,000                                                                                    

Salaries                         $54,000                                                

Utilities                         $13,200                                                

Insurance and other      $7800                                                   

If you install the game center

Rent building space       $18,000

Rent video games         $30,000

Salaries                         $17,000

Utilities                         $5,400

Insurance and other      $9600

Compute the expected net annual cash inflows from each alternative.