Question
A local supermarket is planning to install a sushi vending machine. The machine will cost $60,000 today. Your accountants tell you it must be depreciated
A local supermarket is planning to install a sushi vending machine. The machine will cost $60,000 today. Your accountants tell you it must be depreciated evenly to zero over 8 years. Sushi revenues the first year are estimated to be $30,000, increasing by 5% each year. Sushi and labor costs will be $18,000 the first year, also increasing by 5% each year. Assume these revenues and costs are realized at the end of the year (so they show up for the first time in year 1). Health regulations mandate that supermarket sushi vending machines must be replaced every 5 years. Therefore a plan is in place to sell the machine to an eccentric foodie at the end of 5 years for $30,000. An initial $1,000 investment in inventory must also be made today. Inventory grows by 5% each year until year 5 when it drops to zero. The tax rate is 20%, and the discount rate is 8%. Assume this machine will not impact the store in any other way (e.g., increase foot traffic). Is installing this machine a good idea, financially? Justify your answer.
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