A company is planning a new investment and 116,000€ is the amount that is required to be paid for starting this investment, while the investment is expected to have five years useful life. Depreciation is expensed on a straight-line basis (meaning the same amount is expensed in each period over the asset’s useful life). The residual value is € 2,000 (resale value after depreciation is complete at the end of its useful life of the investment). Net sales revenue is 40,000 for the first year and then is expected to increase progressively by 10% (compared to the previous year). Cost of goods sold (depreciation is not included) are equal to 35% of the net revenues from sales but is expected to decrease continuously by a learning rate of 5% from the second year (thus: 35% – 5%) till the end of the investment. The selling, general and administrative (SGA) expenses of the company (which is actually running some other investments too) are expected to decrease by 3,000€ per year. This decline is solely due to the new investment and will be related to the decision of running this investment or not. Last, the tax rate is 29%. Using this information, you are required to: a. Calculate the investment’s cash flows throughout its five-year-period and its Net Present Value at 15% discount rate. (Assume rounding and no decimal points at euro amounts). Should the company make this investment? b. Calculate the investment’s Internal Rate of Return (Assuming two decimal points). Now, should the company make this investment? c. Evaluate the investment with Simple payback evaluation technique if the acceptable payback period for the investment is four years. (Assuming three decimal points). Should the company run this investment?


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