The current spot exchange rate, S, is $1.60/. Suppose that the yield curve in both countries is flat: The risk-free rate on dollars, is 4%, and the risk-free interest rate on pounds, is 7%. Please calculate NPV of the project.

Axelrod, Inc., headquartered in the United States, wants to apply the NPV technique to value a project in the United Kingdom Developing the product will require an upfront investment of 15 million in capital equipment that will be obsolete in four years and an initial marketing expense of 4.167 million The marketing group expects annual sales of 37.5 million per year for this product line Manufacturing costs and operating expenses are expected to total 15.623 million and 5.625 million per year, respectively Axelrod pays a corporate tax rate of 40% no matter in which country it manufactures its products 0 1 2 3 4 -4.167 1 Year 2 Incremental Earnings Forecast ( million) 3 Sales 4 Cost of Goods Sold 5 Gross Profit 6 Operating Expenses 7 Depreciation 8 EBIT 9 Income Tax at 40% 10 Unlevered Net Income 11 Free Cash Flow 12 Plus: Depreciation 13 Less: Capital Expenditures 14 Less: Increases in NWC 15 Pound Free Cash Flow 37.500 37.500 37.500 37.500 - 15.625 - 15.625 - 15.625 - 15.625 21.875 21.875 21.875 21.875 -5.625 -5.625 -5.625 -5.625 -3.750 -3.750 -3.750 -3.750 12.500 12.500 12.500 12.500 -5.000 -5.000 -5.000 -5.000 7.500 7.500 7.500 7.500 -4.167 1.667 -2.500 3.750 3.750 3.750 3.750 - 15.000 -17.500 11.250 11.250 11.250 11.250