1. Longer Problems: Upload an Excel that shows all your work with step-by-step explanations. Make

sure your final answer is clearly identified.

The Wheel Deal Inc., a company that produces scooters and other wheeled non-

motorized recreational equipment is considering an expansion of their product line to

Europe. The expansion would require a purchase of equipment with a price of

$1,200,000 and additional installation of $300,000 (assume that the installation costs

cannot be expensed, but rather, must be depreciated over the life of the asset).

Because this would be a new product, they will not be replacing existing equipment. The

new product line is expected to increase revenues by euro 600,000 per year over

current levels for the next 5 years, however; expenses will also increase by euro

220,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are

equal, and that the terminal value of the project in year 5 may change total after-tax

cash flows for that year.) The equipment is multipurpose and the firm anticipates that

they will sell it at the end of the five years for euro 500,000. The firm's required rate of

return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a

value of euro 0 over the 5-year life of the equipment, and the project also expects an

increase in NWC of euro 10,000 per year for the next 5 years (to be recovered at the

sale of the equipment at the end of five years). The current spot rate is $0.95/euro, and

the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.

1. What are the EBIT for the Wheel Deal project?

2. What are the free cash flows for the Wheel Deal project?

3. What is the initial investment for the Wheel Deal project?

4. What is the NPV and IRR of the European expansion from the project viewpoint?

5. What are the forecasts of future exchange rates using the purchasing power parity?

6. If all the free cash flows are remitted to the parent, what is the NPV and IRR of the European expansion

from the parent viewpoint?

7. The Wheel Deal Inc. ask you for advise on the investment. What is your recommendation? Explain your

recommendation.