Question

A company considers to buy a factory of Zalando. The purchase price is €1 million and has to be paid at January 1, 2019. The factory has a lifetime of 4 years and is sold at the end of 2022 for a cash inflow after tax for €400,000. The factory will be depreciated in equal amounts in 4 years, so €150,000 per year. The factory has the following net sales forecasted: 31-12-2019 31-12-2020 31-12-2021 31-12-2022 Sales €350,000 €400,000 €450,000 €300,000 Note that at the end of 2019, the factory needs to invest an additional €90,000 in cash in a large warehouse to support its sales (it is running for three years). The residual value at the end of the lifetime is zero. This warehouse is depreciated in equal amounts, so €30,000 per year. There are no other operational costs (zero). The tax rate is 25% and for this warehouse the weighted average cost of capital of Zalando is taken into account at 8%. Assume that all cash flows (in or out) are at the end of the year. Only the investment outlay of €1 million is at the beginning of the year. What is the NPV (net present value) for this project at January 1, 2019? Should management decide to accept or reject the investment in the warehouse: Explain your answer with the help of the NPV-decision rule.

Answer 1