Question
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
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.
Answer 4. the store is having a positive cashflow of 50,000 from the operating activities which is helpful to recover the capital expenditure made to purchase a machine. So, a store should continue to operate a machine to recover the capital expenditure obtained by way of deprecation even though it produces no profits.
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