equipment could be sold for £220,000. The working capital at the factory is £420,000, and could be liquidated for that amount immediately, if required. Alternatively, the working capital can be liquidated in full at the end of the lease period. Immediate closure would result in redundancy payments to employees of £180,000.

If the factory continues in operation until the end of the lease period, the following operating profits (losses) are expected:

Year 1 Year 2 Year 3 Year 4

£000 £000 £000 £000 Operating profit (loss) 160 (40) 30 20 The above figures include a charge of £90,000 a year for depreciation of machinery and equipment. The residual value of the machinery and equipment at the end of the lease period is estimated at £40,000.

Redundancy payments are expected to be £150,000 at the end of the lease period if the factory continues in operation. The business has an annual cost of capital of 12 per cent. Ignore taxation.

Required:

(a) Determine the relevant cash flows arising from a decision to continue operations until the end of the lease period rather than to close immediately.