John worked at the local Indian Restaurant in College City all through his college years. Although the working conditions were good and the pay was not bad, John believed he could do a much better job of managing the restaurant than the current owner-manager. In particular, John believed that the proper use of marketing campaigns and sales incentives, such as selling a second burger for a 25 percent discount, could increase annual sales by 40 percent. Just before graduation in 2018, John inherited $500,000 from his great uncle. He seriously considered buying the restaurant. It seemed like a good idea because he liked the town and its college atmosphere, knew the business, and always wanted to work for himself. He also knew that the current owner wanted to sell the restaurant. John developed the following income statement for the restaurant’s 2017 operations. 

Indian Delicacies Restaurant

Income Statement

For the year ended Dec 31, 2017

Sales		$450,000
Expenses
Cost of food	$150,000
Supplies	$20,000
Employee expenses	$140,000
Utilities	$28,000
Property taxes	$20,000
Insurance	$10,000
Advertising	$8,000
Depreciation	$60,000	$436,000
Net income		$14,000

John believed that the cost of food and supplies were all variable, the employee expenses and utilities were one-half variable and one-half fixed in 2017, and all other expenses were fixed. If John purchased the restaurant and followed through on his plans, he believed there would be a 40 percent increase in unit sales volume and all variable costs. Of the fixed costs, only advertising would increase by $12,000. The use of discounts and special promotions would, however, limit the increase in sales revenue to only 30 percent even though sales volume increased 40 percent.

Determine

1. The current annual net cash inflow.

2. The predicted annual net cash inflow if John executes his plans and his assumptions are correct.

John believes his plan would produce equal net cash inflows during each of the next 15 years, the period remaining on a long-term lease for the land on which the restaurant is built. John believes his plan would produce equal net cash inflows during each of the next 15 years, the period remaining on a long-term lease for the land on which the restaurant is built. At the end of that time, the restaurant would have to be demolished at a predicted net cost of $80,000. Assuming John would otherwise invest the money in stock expected to yield 12%, determine the maximum amount he should pay for the restaurant.

Assume that John accepts an offer from the current owner to buy the restaurant for $350,000. Unfortunately, although the expected increase in sales volume does occur, customers make much more extensive use of the promotions than John had anticipated. As a result, total sales revenues are 8% below projections. Furthermore, to improve employee attitudes, John gave a 10 percent raise immediately after purchasing the restaurant. Reevaluate the initial decision using the actual sales revenue and the increase in labor costs, assuming conditions will remain unchanged over the remaining life of the project. Was the investment decision as wise one? (Round calculations to the nearest dollar.)

Now assume that John already bought the restaurant. He can sell the restaurant to a large franchise operator for $250,000. Alternatively, he believes that additional annual marketing expenditures and changes in promotions costing $20,000 per year could bring the sales revenues up to their original projections, with no other changes in costs. Should John sell the restaurant or keep it and make the additional expenditures? (Round calculations to the nearest dollar.)