A Chicago-based company plans to make a 2 million euro investment in Berlin, Ger

Question

A Chicago-based company plans to make a 2 million euro investment in Berlin, Germany. Cost of capital for this project is 15%. The company will make specialized tubes for solar panels. The 3-year project is expected to generate the following set of cash flows:

The spot exchange rate for the euro currency is $1.25. The term structure of interest rates for both the US Treasury bonds and German government bonds (both are considered default risk free) are as follows:

Using the cash flow conversion approach, calculate the NPV of this international project.

a. -$26,205.01

b. $188,560.97

c. $197,051.85

Year Net CF in Euro 0 -2,000,000 1 700,000 2 800,000 3 1,500,000

Explanation / Answer

CALCULATION OF NPV OF EURO INFLOWS

1EURO=$1.25

2,00,800 EURO=2,00,800*$1.25=$2,51,000

YEAR 0 1 2 3 CASH FLOW(EURO) -20,00,000 7,00,000 8,00,000 15,00,000 PV FACTOR @15% 1 0.870 0.756 0.658 PRESENT VALUE(EURO) -20,00,000 6,09,000 6,04,800 9,87,000 NET PRESENT VALUE(EURO) 2,00,800

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