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IMBA 535- International Finance

By Thelma Tucker,2014-07-01 22:51
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IMBA 535- International Finance

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!

The Project

    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 15 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.

Questions

    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?

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