13 Jan Alternative #1:An owner has $200,000 to invest in
Alternative #1:An owner has $200,000 to invest in a new restaurant. Equipment and furnitureare to be purchased for $170,000, and $30,000 will be used for initialworking capital.First-year estimates anticipate variable costs as a percentageof sales revenue to be:food costs at 35%variable wage costs at 30%other variable costs at 15%.The owner wants an 18% operating income (BT) on his initial investment.Other fixed and semifixed cost estimates are as follows:Management salaries $49,200Rent expense 32,000Insurance expense 4,800Depreciation, furniture, and equipment 20%Alternative #2:The owner is considering borrowing $60,000 from a bank at an 8% interest rate instead of using his own money for the investment.Rather than purchasing $40,000 of the needed equipment, itwould be rented at a cost of $10,000 per year.Analyze each alternative,(1) using invested capital or(2) borrowing $60,000, and renting some of the equipment.Calculate the annual sales revenue needed to provide an18% operating income (BT) of the initial investment.Recommend to the owner how to finance the operation.NOTE:
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