1. 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). If undertaken, the shareholders will contribute $200,000 cash and borrow $800,000 at 5 percent with an interest-only loan with a maturity of 5 years and annual interest payments. 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 from year 0 to year 4 as fixed cost. The corporate tax rate is 12.5 percent in Ireland and 40 percent 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 (K = r_WACC) is 8 percent. i = r_DEBT = 5%. K_u = r_ASSETS = 10%. K_l = r_EQUITY = 15.3%. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.

   CF0 = -$1,180,000 = $1,000,000 investment + (1 - 0.4) x $300,000 lease payment.

   CF1 4 = $349,200 = ($1,000,000 250,000 300,000) x (1 - 0.4) + $198,000 x 0.4

   CF5 = 539,200 = ($1,000,000 250,000) x (1 - 0.4) + $198,000 x 0.4 + 10,000

2. 1. What is the NPV of the project using the WACC methodology? And a decision?
3. 2. What is the NPV of the project using the APV methodology? And a decision?