Chateau Cheval Noir is one of the leading premium wine producers of France, with its fifty-acre vineyard at St. Julien in the Bordeaux region. The owners have wanted to expand their production, but the scarcity and astronomical prices asked for vineyards adjacent to the existing property have led them to explore the possibility of buying a top winery outside of France. They identified both Australia and California as regions that could produce wines of a quality approaching those from their own vineyards. In March 2010, during a trip to the Barossa Valley of South Australia, the owners found an eighty-acre vineyard that promised to meet all of their requirements: soil, exposure, microclimate, age and condition of the vines, condition of the wine-making facilities, and brand image. After a preliminary study, the French owners estimate that the Australian vineyard would have the following attributes:

1. Annual sales of A$16 million, in real (March 2010) terms

2. Earnings before interest and tax of A$14 million, in real (March 2010) terms

3. Annual capital expenditure is equal to annual depreciation expense

4. Working capital requirement equal to 10 percent of sales

5. The economic life of the vineyard, for purposes of the analysis, is five years

6. The value in Australian dollars of the vineyard at the end of five years is estimated as a growing annuity based on the level of cash flow after tax attained in the following year. No growth in real terms is expected after the end of the economic life of the project Other available information relevant to the investment:

1. Annual expected inflation rates: Australia, 5 percent; Euro-zone, 2 percent

2. Spot rate: A$1.75 per €1

3. Required rate of return on investment: 10 percent in euros and 12 percent in Australian dollars

4. Corporate tax rate in Australia: 30 percent; no additional taxes would be paid in France on repatriated income

5. Risk-free rate in euros: 5.5 percent

6. Country risk (penalty taxes imposed by Australia): very low to none

a. What would be the maximum price in Australian dollars and in euros that the owners of Chateau Cheval Noir could pay for the Australian vineyard?

b. Why is there a higher discount rate in Australian dollars than in euros?