Carmelo, SA, is planning to buy equipment costing €120 000 to improve its materials handling system. The equipment is expected to save €40 000 in cash-operating costs per year. Its estimated useful life is six years, and it will have zero terminal disposal value. The required rate of return is 14%.
Required
1. Calculate the net present value. Calculate the internal rate of return.
2. What is the minimum annual cash savings that will make the equipment desirable on a net present-value basis?
3. When might a manager calculate the minimum annual cash savings described in requirement 2 rather than use the €40000 savings in cash-operating costs per year to calculate the net present value or internal rate of return?