Management of Mercedes-Benz ( based in Germany) is considering a foreign direct investment in Canada. Except for this investment, assume that the company has no other foreign operations. The investment would involve acquiring suitable production facilities in Canada.

You have been hired on as a consultant for Mercedes- Benz to advise them on the project.

The following market data have been supplied.

• Canadian risk free rate of interest is 5% and is expected to remain unchanged for the next 4 years.
• German risk free rate of interest is 6% and is expected to remain unchanged for the next 4 years.
• Cost of capital in Germany for a project of this risk would be 12%.
• Current exchange rate is 1CAD = 0.8875 EUR
• Canadian tax is calculated at 40% of taxable income.
• German tax is calculated at 35% of the taxable income.
• Inflation rate in Germany is expected to be 4% per year for the foreseeable future.

Calculate the NPV and IRR of the project in CAD terms. Assume you have decided that the appropriate discount rate for the CAD cash flow should be 11% (ignore your ans to a) above)

Year	Initial Investment	Working capital	Rev - exp	Amortization (depreciation/CCA tax shield)	Taxes	CAD CF after tax
0
1
2
3
4