IMBA 535- International Finance
Instructor: Dr. Cetin Ciner
Case 2- Multinational Capital Budgeting
Please answer all questions and show your work. Due 11/28, good luck!
Round, Round, Get-around Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of ?1,200,000
and additional installation of ?300,000 (assume that the installation costs cannot be
expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by ?600,000 per year over current levels for the next 5
years, however; expenses will also increase by ?200,000 per year. (Note: Assume the
after-tax operating cash flows in years 1–5 are equal, and that the terminal value of the
project in year 5 may change total after-tax cash flows for that year.)
The equipment is multipurpose and the firm anticipates that they will sell it at the end of
500,000. The firm’s required rate of return is 12% and they are in the the five years for ?
40% tax bracket. Depreciation is straight-line to a value of ?0 over the 5-year life of the
equipment, and the investment also requires an increase in NWC of ?100,000 (to be
recovered at the sale of the equipment at the end of five years). The current spot rate is $.95/?, and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.
1) In euros, what is the NPV and IRR of the Round, Round, Get-around expansion?
Be sure to show calculations of annual after tax cash flows.
2) What is the NPV and IRR of the European expansion to the parent if the current
spot exchange rate is used for the whole project?
3) What is the NPV and IRR of the project to the parent if the exchange rates are
forecast according to the purchasing power parity during the life of the project?