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.