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It is 2024 and Carpet Baggers Inc. is proposing to construct a new bagging plant in a

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It is 2024 and Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecast cash flows from the proposed plants are as follows:

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The spot exchange rate for euros is USD1.3 = EUR1, while the rate for Swiss francs is CHF1.5 = USD1. The interest rate is 5% in the United States, 4% in Switzerland, and 6% in the euro countries. The financial manager has suggested that if the cash flows were stated in dollars, a return in excess of 10% would be acceptable.

a. What is the dollar NPV of the German project?

b. What is the dollar NPV of the Swiss project?

c. Should the company go ahead with the German project, the Swiss project, or neither?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
Transcribed Image Text:

C, C3 C6 IRR (%) C2 60 +10 +15 +15 +20 +20 +20 Co C4 C5 Germany (millions of euros) Switzerland (millons of Swiss francs) 18.8 - 120 +20 +30 +30 +35 +35 +35 12.8

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First convert both currencies to US as follows calculation for C ...View the full answer


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Related Video

The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.

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