A Euro based company is considering an investment in the UK. The investment will involve an initial outlay of GBP 12,000,000 for property plant and equipment and GBP 2,000,000 for working capital requirements.

The investment is expected to generate sales of GBP 10,000,000 per year over five years; cash costs are expected to be 60% of sales. The property plant and equipment will be depreciated on a straight-line basis over five years (GBP 2,400,000 per year).

At the end of the five years, the property plant and equipment are expected to have no salvage value. The working capital is expected to be returned. The corporate tax rate is 30%.

The spot EUR-GBP exchange rate is 0.8500 GBP per EUR.

Build a spreadsheet to compute the NPV (in Euro) and the IRR of the project assuming that the EUR-GBP exchange rate remains unchanged - assume a cost of capital of 10%.

Examine the sensitivity of the NPV and IRR of the project, again assuming a constant EUR-GBP FX rate, varies if the cash cost of sales varies between 50% and 70%.

Assume that the EUR-GBP exchange rate is a log-normally distributed random variable, with mean log return of zero and standard deviation of annual returns equal to 8%.  

Required:

Compute the NPV under 10,000 scenarios, plot a histogram of the results and estimate the probability of the NPV being below zero.