Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States. The project

Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year, sales price of $20 per widget with a contribution margin of $15 per widget.

The project will last for 5 years; require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the start of each year.

The corporate tax rate is 12% in Ireland and 40% in the U.S.

For simplicity, assume that taxes are paid like sales taxes: immediately.

The spot exchange rate is $1.50 = 1.00. The cost of capital to the Irish firm for a domestic project of this risk is 8%. The U.S. risk-free rate is 3%; the Irish risk-free rate is 2%.

a. What is CF0 in dollars?

b. What is CF1 in dollars?

c. What is CF5 in dollars?

d. What is the NPV of the U.S.-based project to the Irish firm?

e. What is the dollar-denominated IRR?

f. What is the euro-denominated IRR?

g. Find the break-even price (in dollars) and break-even quantity for the U.S. project.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Investments Valuation and Management

Authors: Bradford Jordan, Thomas Miller

7th edition

978-0078096785, 78096782, 978-0077861636, 77861639, 978-0078115660

More Books

Students also viewed these Finance questions