The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of $1,200,000 and additional installation of $300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 220,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the project also expects an increase in NWC of euro 10,000 per year for the next 5 years (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $0.95/euro, and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.

1. What are the EBIT for the Wheel Deal project?
2. What are the free cash flows for the Wheel Deal project?
3. What is the initial investment for the Wheel Deal project?
4. What is the NPV and IRR of the European expansion from the project viewpoint?
5. What are the forecasts of future exchange rates using the purchasing power parity?
6. If all the free cash flows are remitted to the parent, what is the NPV and IRR of the European expansion from the parent viewpoint?
7. The Wheel Deal Inc. ask you for advise on the investment. What is your recommendation? Explain your recommendation

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