2010-11-23_070004_carpet

2010-11-23_070004_carpet - between them which should it...

This preview shows page 1. Sign up to view the full content.

Carpet Baggers, Inc., is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows: C0 C1 C2 C3 C4 C5 C6 IRR (%) Germany (millions of euros) 60 10 15 15 20 20 20 18.8 Switzerland (millions of Swiss francs) 120 20 30 30 35 35 35 12.8 The spot exchange rate for euros is \$1.3/k, while the rate for Swiss francs is SFr 1.5/\$. The interest rate is 5 percent in the United States, 4 percent in Switzerland, and 6 percent in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10 percent would be acceptable. Should the company go ahead with either project? If it must choose
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: between them, which should it take? 1+euro return=(1+dollar return)*(1+r euro )/(1+r \$ )=1.1*1.06/1.05=1.11 Euro return on the project=11% 1+SFr return=(1+dollar return)*(1+r SFr )/(1+r \$ )=1.1*1.04/1.05=1.09 SFr return on the project=9% 1 2 3 4 5 6 10 15 15 20 20 20 60 (1.11) (1.11) (1.11) (1.11) (1.11) (1.11) Germany NPV = -+ + + + + + = 7.888 7.888 × 1.03 = \$10.25 1 2 3 4 5 6 20 30 30 35 35 35 120 (1.09) (1.09) (1.09) (1.09) (1.09) (1.09) Switzerland NPV = -+ + + + + + = 15.176 15.176 ÷ 1.05 =\$10.12 The company should go ahead with the project. It had better construct a new plant in Germany since Germany Switzerland NPV NPV f...
View Full Document

This note was uploaded on 07/16/2011 for the course ACCOUNTING 203 taught by Professor Jones during the Spring '11 term at Kaplan University.

Ask a homework question - tutors are online