Your firm is interested in making an investment in Germany. The required initial

investment is 1 billion and is expected to produce cash flows of 100 million in Year 1,

200 million in Year 2, 300 million in Year 3, 400 million in Year 4, and 500 million

in Year 5. The investment can be depreciated to zero by a straight line method in 5 years.

The current spot exchange rate is $1.50/ 1, and current risk-free rates in Canada and

Germany are 6% and 4% respectively. The weighted average cost of capital for your

company is 12 percent and this rate is considered to be the appropriate discount rate for

the projects undertaken by your company in Canada. You believe that this rate is also

appropriate to discount the cash flows of the project under consideration. The assets for

this project are expected to be sold for 100 million at the end of the fifth year. The

company must pay 20% corporate tax to the government in Germany.

(a) Should your firm undertake the investment? Show your work clearly.

(b) Is it reasonable to use the same discount rate for this project as you use for your

domestic projects? What other factors should be considered ?

(c) If you need to borrow 1 billion for this investment and you are able to obtain this

loan at the same rate in either country, in which country would you borrow? Why?