Ireland Depreciation Included in Incremental Cash Flow?

[Daniel Coughlan]

I was wondering if anyone could relieve me of my ignorance in regards to this finance question.

Andes plc, an Irish company, is considering the establishment of a subsidiary in France. The
following information is relevant:
(a) The project will require an initial investment of €40 million for equipment and €20 million for
working capital.
(b) The product to be sold by the subsidiary has the following characteristics:


Year Price € Demand (units) Variable cost €
1 500 40,000 30
2 511 50,000 35
3 530 60,000 40

(c) Fixed costs are budgeted to be €6 million p.a.
(d) It is estimated that French taxes will amount to €2.34 million p.a. and that no additional taxes will be imposed by the Irish government.
(e) Equipment has an estimated useful life of eight years and will be depreciated using the straight-line method.
(f) At the end of three years the French subsidiary (including working capital) will be sold by Andes plc for €60 million (net of taxes).
(g)It is company policy to use a discount rate of 20% in net present value computations for new projects.
1.5milon
Required:
Assess whether Andes plc should establish the French subsidiary. (15 marks)

My real question is - Is depreciation included and if so how do you include it?

 

[Fidget]

It's not included directly, but the equipment has a useful life of 8 years and will be sold as part of the subsidiary after 3 years when, based on depreciated cost, it has a net book value of 25m.