Evaluate the proposals and make recommendations to management on the best course of action    

The Approach to this question focuses on the relevant cash flows for the decision to either hold and use the assets or sell now. You will notice that the question does not ask you to assess the decision based on any one investment appraisal technique. This situation is a mutually exclusive one and thus the appropriate technique to use in assessing this decision is the net present value approach.

Sell now option

In this option the relevant cash flow is the cash received if the assets are sold. The original cost of the asset and net book value are sunk costs and thus irrelevant to the decision. The profit on the sale is irrelevant as it takes into account the sunk cost of the net book value of the assets. The cash received for selling the assets are received immediately and they represent the present value of that transaction. Thus the present value of the cash flows received in selling the assets is €250,000.

Hold the assets option

In this option the relevant cash flows are the sales revenues and the variable costs. Depreciation is excluded as it is simply a restatement of the cost of the asset. Fixed costs are also excluded as they would occur irrespective of the decision and thus are non incremental. The relevant cash flows discounted at 15% are as follows

 Based on the net present value approach management should hold and use the assets.