Question 5Total 10 marks

A US Multinational is considering a European investment opportunity. The size and timing of the after-tax cash flows are as follows: Initial investment required is 600. The cash flows of the following 3 years are 200, 500 and 300. The inflation rate in the euro zone is 3%, the inflation rate in dollars is 6%. The rate of return required by this US firm is 15%. The current exchange rate is 1.25$/.

Required:

Please describe the two methods which can be used to calculate the net present value (NPV) to determine if this is a good investment for the US firm. (No calculations required)