Question
A Chicago-based company plans to make a 2 million euro investment in Berlin, Germany. Cost of capital for this project is 15%. The company will
A Chicago-based company plans to make a 2 million euro investment in Berlin, Germany. Cost of capital for this project is 15%. The company will make specialized tubes for solar panels. The 3-year project is expected to generate the following set of cash flows:
| Year | Net CF in Euro |
|---|---|
| 0 | -2,000,000 |
| 1 | 700,000 |
| 2 | 800,000 |
| 3 | 1,500,000 |
The spot exchange rate for the euro currency is $1.25. The term structure of interest rates for both the US Treasury bonds and German government bonds (both are considered default risk free) are as follows:
| US | GERMAN | |
|---|---|---|
| Term | Yield | Yield |
| 1 | 1.29% | 2.50% |
| 2 | 1.57% | 2.54% |
| 3 | 1.79% | 2.86% |
Using the cash flow conversion approach, calculate the NPV of this international project.
a. -$26,205.01
b. $188,560.97
c. $197,051.85
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