Question
4 C . (20 Marks) A large store is deciding whether to install a machine in each of its store. Each machine costs $250,000. Projected
4 C. (20 Marks)
A large store is deciding whether to install a machine in each of its store. Each machine costs $250,000. Projected income per machine is as follows:
Year | 1 | 2 | 3 | 4 | 5 |
Sales | 200,000 | 300,000 | 300,000 | 250,000 | 250,000 |
Operating Expenses | 200,000 | 200,000 | 200,000 | 200,000 | 200,000 |
Depreciation | 50,000 | 50,000 | 50,000 | 50,000 | 50,000 |
Accounting Income | 0 | 50,000 | 50,000 | 0 | 0 |
Why would the store continue to operate a machine in Years 4 and 5 if it produces no profits? What are the cash flows from investing in a machine? Assume each machine is completely depreciated and has no salvage value at the end of its 5 years life. Show all your workings and justify your answer.
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