Question
Schwarz, a German firm, is considering a four- year project in China that requires an investment (capital expenditure) of EUR 600,000. The following additional information
Schwarz, a German firm, is considering a four- year project in China that requires an investment (capital expenditure) of EUR 600,000. The following additional information is presented:
Rt= CNY 1,750,000 x 1.15t -1(i. e., annual growth rate of revenue is 15 percent)
Direct expenses are 25 percent of revenues.
Fixed expenses are CNY 250,000 annually.
Net working capital for each year equals 25 percent of revenues for the following year. Taxes are 32 percent.
Assume straight- line depreciation for tax purposes. After- tax salvage value is CNY 4 million. Spot EURCNY equals 7.0.Assume that interest rates in Europe and China are 1.5 percent and 6 percent, respectively, and annual compounding. Making appropriate assumptions, what is the EUR cash flows in year 4?
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