You have to decide about an investment proposal for a new appliance. The initial investment is
250,000 €, due Jan. 1, 2023. You want to sell the appliance after three years. The estimated salvage
value at the end of 2025 is assumed to be 25,000 €. Your firm applies straight line depreciation. In
addition to depreciations your annual fixed costs (payable in cash) are 22,000 €. Moreover, you
have the following projections:
Year 2023 2024 2025
Annual cash sales 150,000 165,000 190,000
Annual variable costs (payable in cash) 45,000 48,000 53,000
For simplicity assume that all payments (except for the initial investment) are made at the end of a year. To finance the initial investment, a loan over 80,000 € is required. The interest rate on the loan is 3%.
Produce the projected P&L for the next three years.
Calculate the relevant cash flows based on this P&L.
Calculate the NPV at 10% and the equivalent annuity.
Determine IRR of the project using the corresponding excel function.
Provide a graph for the “NPV curve”.
