Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States.The project involves selling widgets. It will last for 5 years with a required initial investment of $1,180,000. The project will generate after-tax cash flow of $349,200 every year for 5 years. At the end of the project, the equipment is projected to be sold for $190,000, leading toan additional cash flow at the end of year 5.The spot exchange rate is $1.50 €1.00. The cost of capital to the Irish firm for a domestic project of this risk is 8 percent. The U.S.inflation rate is 3 percent; the Irish inflation rate is 2 percent.(a) What is the equivalent $ cost of capital?(b) Determine the NPV of the project in $.(c) Calculate NPV in € assuming the PPP holds.(d) What would be the NPV in $ if the US inflation rate is 2% and Irish inflation rate is 3%?Please show your calculation for all the above questions. Otherwise the mark wouldn't be earned.

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Answered: (a) What is the equivalent $ cost of…

(a) What is the equivalent $ cost of capital? (b) Determine the NPV of the project in $. (c) Calculate NPV in € assuming the PPP holds.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 34QA

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