On January 1, 2009, a U.S. firm made an investment in Germany that will generate $5 million annually in depreciation, converted at the current spot rate. Projected annual rates of inflation in Germany and in the United States are 5 percent and 2 percent, respectively. The real exchange rate is expected to remain constant, and the German tax rate is 50 percent.
Required:
Calculate the expected real value (in terms of January 1, 2009, dollars) of the depreciation charge in year 2013. Assume that the tax write-off is taken at the end of the year.