8. Giant Widget Co., based in Oklahoma, is looking to expand into Egypt. Giant Widget can build a new plant in Egypt for 75 million Egyptian pounds. Giant Widget expect to use the plant for 4 years and then sell it for salvage value of 30 million pounds. Giant Widget expects after-tax cash flows of 20 million pounds in each of the four years. You can ignore depreciation and capital gains taxes. The current exchange rate is $.064 per Egyptian pound. Giant Widget expects the exchange rate to fall to $.063 in one year, $.062 in two years, $.061 in three years, $.060 in four years. The risk-free interest rate in the United States is 4 percent, whereas the risk-free interest rate in Egypt is 9 percent. Giant Widgets capital structure is 50 percent debt and 50 percent equity. The company is charged an interest rate of 8 percent on its debt. Giant Widgets cost of equity is based on the CAPM. It expects that the U.S. annual stock market return will be 14 percent per year. Its beta is 0.8, and its tax rate is 25 percent.

a. (4 points) What is Giant Widgets weighted average cost of capital?

b. (10 points) What is the net present value, in U.S. dollars, to Giant Widget from this expansion into Egypt? Should Giant Widget Co. go forward with this proposal? Why or why not?