1. Profit forecasts
A company is considering investing in a project with a five-year useful life. The project involves paying €75000 for a license to manufacture a new product and equipping a production line at a cost of €300000. The product is expected to have a useful life of five years only and at the expiry of that time the production line will be sold and should yield a salvage value of €50000. In order to launch the product the company plans a three-month advertising campaign that will cost €100000.
Assuming that in each year the expected sales are €l OOOOOO and expenses other than those detailed above are €8OOOOO, draw up two alternative series of statements of profit or loss for the project using (a) straight-line, and (b) diminishing balance depreciation of 30 per cent per annum, for the plant, while treating the other expenses consistently in each set.
If, for policy reasons, the company wished to maximize profits in the first two years of operation, what accounting choices could be made (within the terms of generally accepted accounting principles) to achieve this?