Homeric Industries based in Chicago IL wants you to evaluate a new production fa
ID: 2785637 • Letter: H
Question
Homeric Industries based in Chicago IL wants you to evaluate
a new production facility in Germany
all cash flows will be in euros
The projected will be completed in 2017 and run for 10 years
Cash flows in euros are shown below
Euro spot rate and forecasts
2017
-4,000,000 €
1.17
dollars/euro
2018
500,000 €
1.15
2019
550,000 €
1.13
2020
605,000 €
1.15
2021
665,500 €
1.18
2022
732,050 €
1.20
2023
805,255 €
1.22
2024
885,781 €
1.25
2025
974,359 €
1.27
2026
1,071,794 €
1.30
2027
1,178,974 €
1.32
Financing will be arranged through your New York Bank
The equivalent amount of dollars will be borrowed so that when converted
translate into the required 4 million euros.
Your cost of capital is
8%
You are a dollar based firm and all euro cash flows will be repatriated
at the end of each year and converted into dollars
What do you recommend? Should your company go through with the project?
Why or why not?
Show NPV, IRR and MIRR
You are also asked to evaluate the project assuming that the euro stays at
$1.17/euro for the life of the project. What do you recommend now?
Again, base your recommendation of NPV, IRR and MIRR
What if the euro steady declines by 1% per year from 2018 on. What is your recommendation now?
What if the euro steady declines by 2% per year from 2018 on. What is your recommendation now?
Finally, you have to come up with a go/no go decision. What would you choose? Do the
project or skip it for now?
Homeric Industries based in Chicago IL wants you to evaluate
a new production facility in Germany
all cash flows will be in euros
The projected will be completed in 2017 and run for 10 years
Cash flows in euros are shown below
Euro spot rate and forecasts
2017
-4,000,000 €
1.17
dollars/euro
2018
500,000 €
1.15
2019
550,000 €
1.13
2020
605,000 €
1.15
2021
665,500 €
1.18
2022
732,050 €
1.20
2023
805,255 €
1.22
2024
885,781 €
1.25
2025
974,359 €
1.27
2026
1,071,794 €
1.30
2027
1,178,974 €
1.32
Financing will be arranged through your New York Bank
The equivalent amount of dollars will be borrowed so that when converted
translate into the required 4 million euros.
Your cost of capital is
8%
You are a dollar based firm and all euro cash flows will be repatriated
at the end of each year and converted into dollars
What do you recommend? Should your company go through with the project?
Why or why not?
Show NPV, IRR and MIRR
You are also asked to evaluate the project assuming that the euro stays at
$1.17/euro for the life of the project. What do you recommend now?
Again, base your recommendation of NPV, IRR and MIRR
What if the euro steady declines by 1% per year from 2018 on. What is your recommendation now?
What if the euro steady declines by 2% per year from 2018 on. What is your recommendation now?
Finally, you have to come up with a go/no go decision. What would you choose? Do the
project or skip it for now?
Explanation / Answer
1) NPV: Year Cash flows in Euros Exchange rate $/E CF in $ PVIF at 8% PV at 8% 2017 -40,00,000 € 1.17 $ -46,80,000 1.00000 $ -46,80,000 2018 5,00,000 € 1.15 $ 5,75,000 0.92593 $ 5,32,407 ` 2019 5,50,000 € 1.13 $ 6,21,500 0.85734 $ 5,32,836 2020 6,05,000 € 1.15 $ 6,95,750 0.79383 $ 5,52,309 2021 6,65,500 € 1.18 $ 7,85,290 0.73503 $ 5,77,212 2022 7,32,050 € 1.20 $ 8,78,460 0.68058 $ 5,97,865 2023 8,05,255 € 1.22 $ 9,82,411 0.63017 $ 6,19,086 2024 8,85,781 € 1.25 $ 11,07,226 0.58349 $ 6,46,056 2025 9,74,359 € 1.27 $ 12,37,436 0.54027 $ 6,68,548 2026 10,71,794 € 1.30 $ 13,93,332 0.50025 $ 6,97,013 2027 11,78,974 € 1.32 $ 15,56,246 0.46319 $ 7,20,843 NPV = $1,464,174 $ 14,64,174 2) IRR: Year Cash flows in Euros Exchange rate $/E CF in $ PVIF at 13% PV at 13% PVIF at 14% PV at 14% 2017 -40,00,000 € 1.17 $ -46,80,000 1.00000 $ -46,80,000 1.00000 $ -46,80,000 2018 5,00,000 € 1.15 $ 5,75,000 0.88496 $ 5,08,850 0.87719 $ 5,04,386 2019 5,50,000 € 1.13 $ 6,21,500 0.78315 $ 4,86,726 0.76947 $ 4,78,224 2020 6,05,000 € 1.15 $ 6,95,750 0.69305 $ 4,82,190 0.67497 $ 4,69,611 2021 6,65,500 € 1.18 $ 7,85,290 0.61332 $ 4,81,633 0.59208 $ 4,64,955 2022 7,32,050 € 1.20 $ 8,78,460 0.54276 $ 4,76,793 0.51937 $ 4,56,245 2023 8,05,255 € 1.22 $ 9,82,411 0.48032 $ 4,71,870 0.45559 $ 4,47,573 2024 8,85,781 € 1.25 $ 11,07,226 0.42506 $ 4,70,638 0.39964 $ 4,42,489 2025 9,74,359 € 1.27 $ 12,37,436 0.37616 $ 4,65,474 0.35056 $ 4,33,794 2026 10,71,794 € 1.30 $ 13,93,332 0.33288 $ 4,63,819 0.30751 $ 4,28,461 2027 11,78,974 € 1.32 $ 15,56,246 0.29459 $ 4,58,452 0.26974 $ 4,19,788 $ 86,444 $ -1,34,474 IRR = 13+86444/(86444+134474) =13.39% 3) MIRR: Year CF in $ FVIF at 8% FV at 8% 2017 $ -46,80,000 2018 $ 5,75,000 1.99900 $ 11,49,428 2019 $ 6,21,500 1.85093 $ 11,50,353 2020 $ 6,95,750 1.71382 $ 11,92,393 2021 $ 7,85,290 1.58687 $ 12,46,157 2022 $ 8,78,460 1.46933 $ 12,90,746 2023 $ 9,82,411 1.36049 $ 13,36,559 2024 $ 11,07,226 1.25971 $ 13,94,786 2025 $ 12,37,436 1.16640 $ 14,43,345 2026 $ 13,93,332 1.08000 $ 15,04,799 2027 $ 15,56,246 1.00000 $ 15,56,246 $ 1,32,64,812 MIRR=(13264812/4680000)^(1/10)-1= 10.98% RECOMMENDATION: The company can undertake the project as the NPV is positive. IRR and IRR are > WACC. IF THE EURO STAYS AT 1.17$ THROUGHT OUT: Year Cash flows in Euros Exchange rate $/E CF in $ PVIF at 8% PV at 8% 2017 -40,00,000 € 1.17 $ -46,80,000 1.00000 $ -46,80,000 2018 5,00,000 € 1.17 $ 5,85,000 0.92593 $ 5,41,667 ` 2019 5,50,000 € 1.17 $ 6,43,500 0.85734 $ 5,51,698 2020 6,05,000 € 1.17 $ 7,07,850 0.79383 $ 5,61,914 2021 6,65,500 € 1.17 $ 7,78,635 0.73503 $ 5,72,320 2022 7,32,050 € 1.17 $ 8,56,499 0.68058 $ 5,82,918 2023 8,05,255 € 1.17 $ 9,42,148 0.63017 $ 5,93,713 2024 8,85,781 € 1.17 $ 10,36,364 0.58349 $ 6,04,708 2025 9,74,359 € 1.17 $ 11,40,000 0.54027 $ 6,15,907 2026 10,71,794 € 1.17 $ 12,53,999 0.50025 $ 6,27,312 2027 11,78,974 € 1.17 $ 13,79,400 0.46319 $ 6,38,929 NPV = $1,211,086 $ 12,11,086 2) IRR: Year Cash flows in Euros Exchange rate $/E CF in $ PVIF at 13% PV at 13% PVIF at 12% PV at 12% 2017 -40,00,000 € 1.17 $ -46,80,000 1.00000 $ -46,80,000 1.00000 $ -46,80,000 2018 5,00,000 € 1.17 $ 5,85,000 0.88496 $ 5,17,699 0.89286 $ 5,22,321 2019 5,50,000 € 1.17 $ 6,43,500 0.78315 $ 5,03,955 0.79719 $ 5,12,994 2020 6,05,000 € 1.17 $ 7,07,850 0.69305 $ 4,90,576 0.71178 $ 5,03,834 2021 6,65,500 € 1.17 $ 7,78,635 0.61332 $ 4,77,551 0.63552 $ 4,94,837 2022 7,32,050 € 1.17 $ 8,56,499 0.54276 $ 4,64,873 0.56743 $ 4,86,000 2023 8,05,255 € 1.17 $ 9,42,148 0.48032 $ 4,52,531 0.50663 $ 4,77,322 2024 8,85,781 € 1.17 $ 10,36,364 0.42506 $ 4,40,517 0.45235 $ 4,68,798 2025 9,74,359 € 1.17 $ 11,40,000 0.37616 $ 4,28,822 0.40388 $ 4,60,427 2026 10,71,794 € 1.17 $ 12,53,999 0.33288 $ 4,17,437 0.36061 $ 4,52,205 2027 11,78,974 € 1.17 $ 13,79,400 0.29459 $ 4,06,355 0.32197 $ 4,44,130 $ -79,683 $ 1,42,867 IRR = 12+142867/(142867+79683)=12.64% 3) MIRR: Year CF in $ FVIF at 8% FV at 8% 2017 $ -46,80,000 2018 $ 5,85,000 1.99900 $ 11,69,418 2019 $ 6,43,500 1.85093 $ 11,91,074 2020 $ 7,07,850 1.71382 $ 12,13,131 2021 $ 7,78,635 1.58687 $ 12,35,596 2022 $ 8,56,499 1.46933 $ 12,58,477 2023 $ 9,42,148 1.36049 $ 12,81,782 2024 $ 10,36,364 1.25971 $ 13,05,520 2025 $ 11,40,000 1.16640 $ 13,29,696 2026 $ 12,53,999 1.08000 $ 13,54,319 2027 $ 13,79,400 1.00000 $ 13,79,400 $ 1,27,18,412 MIRR=(12718412/4680000)^(1/10)-1= 10.51% RECOMMENDATION: As the NPV is positive the project can be accepted. The IRR and MIRR are greater than WACC. EURO STEADILY DECLINES BY 1% Year Cash flows in Euros Exchange rate $/E CF in $ PVIF at 8% PV at 8% 2017 -40,00,000 € 1.17 $ -46,80,000 1.00000 $ -46,80,000 2018 5,00,000 € 1.18 $ 5,90,000 0.92593 $ 5,46,296 2019 5,50,000 € 1.19 $ 6,54,500 0.85734 $ 5,61,128 2020 6,05,000 € 1.21 $ 7,32,050 0.79383 $ 5,81,125 2021 6,65,500 € 1.22 $ 8,11,910 0.73503 $ 5,96,778 2022 7,32,050 € 1.23 $ 9,00,422 0.68058 $ 6,12,812 2023 8,05,255 € 1.24 $ 9,98,516 0.63017 $ 6,29,235 2024 8,85,781 € 1.25 $ 11,07,226 0.58349 $ 6,46,056 2025 9,74,359 € 1.27 $ 12,37,436 0.54027 $ 6,68,548 2026 10,71,794 € 1.28 $ 13,71,896 0.50025 $ 6,86,290 2027 11,78,974 € 1.29 $ 15,20,876 0.46319 $ 7,04,460 NPV = $1,552,728 $ 15,52,728 As the NPV is positive the project can be accepted. EURO STEADILY DECLINES BY 2% Year Cash flows in Euros Exchange rate $/E CF in $ PVIF at 8% PV at 8% 2017 -40,00,000 € 1.17 $ -46,80,000 1.00000 $ -46,80,000 2018 5,00,000 € 1.19 $ 5,95,000 0.92593 $ 5,50,926 2019 5,50,000 € 1.22 $ 6,71,000 0.85734 $ 5,75,274 2020 6,05,000 € 1.24 $ 7,50,200 0.79383 $ 5,95,533 2021 6,65,500 € 1.27 $ 8,45,185 0.73503 $ 6,21,236 2022 7,32,050 € 1.29 $ 9,44,345 0.68058 $ 6,42,705 2023 8,05,255 € 1.32 $ 10,62,937 0.63017 $ 6,69,830 2024 8,85,781 € 1.34 $ 11,86,947 0.58349 $ 6,92,572 2025 9,74,359 € 1.37 $ 13,34,872 0.54027 $ 7,21,190 2026 10,71,794 € 1.40 $ 15,00,512 0.50025 $ 7,50,629 2027 11,78,974 € 1.43 $ 16,85,933 0.46319 $ 7,80,913 NPV = $1,920,809 $ 19,20,809 As the NPV is positive the project can be accepted.
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