Osborne Books - Level 4 synoptic workbook, page 29, task 4

candybr2017

Hello, can anyone please explain the calcluation for task 4 in Level 4 synoptic workbook, page 29?
i don't understand why the cash flow amount has to minus 60K. The answer shows in the book for the cash flow in Y1 is (275k+50k-60k)=265K



I have attached the quesiton.

Thanks
Haili

Pian32

It's beacuse the £60,000 is overall irrelevant to the decision and is therefore not included in the considered cash flow.

If the plant is open:
£275,000 is made including £50,000 in management cost

If the plant is closed
The management cost still occurs and £60,000 is gained at another site.

Therefore cash flow
=£275,000 (made from being open) + £50,000 (cost occurs either way) - £60,000 (Income that would occur even if closed)