Investment Analysis

A plane company wants to upgrade their engines and analyse the investment over the next 5 years. The upgrade costs 800keur, and will require additional trainings in year 1 and year 3, costing 100k and 50k respectively. If you upgrade you will be able to sell your old engines secondhand and recover 300k eur in year 2.

Given:

• RAROR = 15% (use as discount rate when calculating NPV)

• tax = 14%

• total costs for both engines becomes greater every year with 4%

• for old engines: year 1 costs for maintenance, wages and fuel = 400k

• for new engines: year 1 = 180k

Asked:

• Is this a good investment? Perform a cash flow analysis and motivate your answer. [one page only, including calculation space]

• Why is a company allowed to depreciate its assets? [half page]

• Explain NPV in your own words [half page]