Question
P&G Inc., a U.S. MNC, is contemplating making a foreign capital expenditure in Germany. The initial cost of the project is 250,000,000. The annual cash
P&G Inc., a U.S. MNC, is contemplating making a foreign capital expenditure in Germany. The initial cost of the project is 250,000,000. The annual cash flows over the three year economic life of the project in are estimated to be 30,000,000 in year 1; 175,000,000 in year 2; and 220,000,000 in year 3. P&G s cost of capital in U.S. dollars is 18% percent. Long-run inflation is forecasted to be positive 2 percent (+2%) per annum in the U.S. and positive 1 percent (+1%) for euro zone countries. The current spot foreign exchange rate is = $1.1101/. Determine the present value for P&Gs project in USD. Find this PV two ways. First way, find the euro equivalent cost of capital. Then determine the present value for the project in USD by calculating the NPV in euros discounted at the euro equivalent cost of capital and then converting the NPV in euros to USD.
ANSWER: The euro equivalent cost of capital = _________
ANSWER: The present value in dollars = _________
Second way, determine the present value for the project in dollars by converting all euro cash flows to dollars then calculating the NPV in USD. ANSWER: The present value in dollars = __________
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