20. 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 forecasted cash flows from the proposed plants are as follows:

C0 C1 C2 C3 C4 C5 C6 IRR(%)
Germany (millions of euros) 60 10 15 15 20 20 20 18.8 Switzerland (millions of Swiss francs) 120 20 30 30 35 35 35 12.8 The spot exchange rate for euros is $1.3/€, while the rate for Swiss francs is SFr 1.5/$. 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.
Should the company go ahead with either project? If it must choose between them, which should it take?
CHALLENGE