The following project-specific information is known about investment in a beer brewery in a Western European country that uses the euro.

The project lasts 2 years. Operating cash flows are received at year-end.

The euro inflation rate is 10 percent per year.

All cash flows have a nominal discount rate of 20 percent per year.

€100,000 will purchase land for the brewery. The real value of the land is expected to remain constant at

€100,000 thereafter.

Constructing the brewery costs €50,000, payable at the start of the project. The brewery will be owned by a foreign subsidiary and depreciated on a straight-line basis over two years to a zero salvage value. The brewery is expected to be sold for €25,000 after two years.

An immediate investment in working capital of €50,000 is necessary. The value of this investment is expected to grow at the rate of inflation.

Annual sales are expected to be 5,000 barrels/year.

Beer is expected to sell for €110 per barrel in the first year, and then increase at the euro rate of inflation during year two.

Variable operating costs are 20 percent of sales.

Fixed operating costs are expected to be €22,000 in the first year, and then increase at the euro rate of inflation during year two.

Local tax rates on income and capital gains are 40 percent.

a. Identify expected future euro cash flows and value them at the appropriate euro discount rate.

b. Suppose the current spot exchange rate is .
The nominal discount rate on brewery projects in the United States also is 20 percent. Assuming the international parity conditions hold, calculate the dollar value of the brewery project from the parent's perspective as in Equation (13.5). Value the project again using the project's perspective in Equation (13.2).
Are these values the same?