A U.S. based firm is planning to set up a project in France with an expected lif

Question

A U.S. based firm is planning to set up a project in France with an expected life of 5 years. The project is expected to generate a cash flows of euros 2 million, 2.5 million, 3 million, 3.25 million and 3.5 million over the next five years. The project requires an initial investment of $8 million. The current spot rate of euro is $1.25 which is expected to depreciate by 1.5% per year over the next 5 years. What is the NPV of this project in $ terms at a cost of capital of 8% Answer a.$5,296,136 b.$3,296,136 c.$3,147,584 d.$4,222,345

Explanation / Answer

Let IRR be r Spot rate in year 1 = $1.25*(1-1.5%) =$1.23125 Spot rate in year 2 = $1.25*(1-1.5%)^2 Spot rate in year 3 = $1.25*(1-1.5%)^3 Spot rate in year 4 = $1.25*(1-1.5%)^4 Spot rate in year 5 = $1.25*(1-1.5%)^5 NPV = -8*1.25 + 2*$1.25*(1-1.5%)/(1+r) + 2.5*$1.25*(1-1.5%)^2/(1+r)^2 + 3*$1.25*(1-1.5%)^3/(1+r)^3 + 3.25*$1.25*(1-1.5%)^4/(1+r)^4 + 3.5*$1.25*(1-1.5%)^5/(1+r)^5 NPV =0 for IRR IRR =18.77%

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