Response to the following problem:
A company is deciding whether to install a ‘kids-fun machine' in one of its supermarkets. The cost of the machine is $540,000. Income projections for the machine are:
|
1 |
2 |
3 |
4 |
5 |
6 |
|
Sales
|
450,000
|
425,000
|
425,000
|
300,000
|
280,000
|
275,000
|
|
Operating expenses
|
220,000
|
220,000
|
220,000
|
230,000
|
220,000
|
220,000
|
|
Depreciation
|
90,000
|
90,000
|
90,000
|
90,000
|
90,000
|
90,000
|
|
Accounting Profit
|
140,000
|
115,000
|
115,000
|
(20,000)
|
(30,000)
|
(35,000)
|
Assume no tax; no salvage value.
Required:
a) What are the cash flows for this project?
b) Why should the company continue to operate the machine in Years 4, 5 and 6 if it makes a loss in those respective years?