Question
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. It will last for 5 years with a required initial investment of $1,180,000. The project will generate after-tax cash flow of $349,200 every year for 5 years. At the end of the project, the equipment is projected to be sold for $190,000, leading to an additional cash flow at the end of year 5.
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 percent. The U.S. inflation rate is 3 percent; the Irish inflation rate is 2 percent.
(a) What is the equivalent $ cost of capital?
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