1. Eurobike in Germany considers an investment in Turkey to produce bicycles. The initial investment for the project is 2 mn and the factory is expected to generate cashflows of TL5 bn in year1, TL7 mn in year 2, TL9 mn in year 3, TL15 mn in year 4 and TL10 mn in year 5.

Spot rate of EURTL is 7 and TL is expected by depreciate by 5% each year in the next 5 years.

Eurobike requires a 20% return from the project.

1. Should Eurobike do the project? (10 points)

Assume the project doesnt go as planned and generates only TL1 mn cashflow in year 1 and 2 and cashflow is expected to grow by only 10% until the end of the project. A local competition wants to buy the project for 1 mn at year 3. Should Eurobike sell?