A MULTINATIONAL COMPANY IS CONSIDERING THE ESTABLISHMENT OF A TWO-...
13. A multinational company is considering the establishment of a two-year project in Germany with a $8 million initial investment. The company's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project with no salvage value after two years is expected to generate net cash flows of 12 million euros in year 1 and 30 million euros in year 2. Assume no taxes and a stable exchange rate of $0.60 per euro. What is the net present value of the project in dollar terms? A. about $30 million B. about $12 million * C. about $11 million D. about $10 million E. about $ 8 million Solution: Year 1: 12,000,000 euros x $0.60 = $ 7,200,000 Year 2: 30,000,000 euros x $0.60 = $18,000,000 Net present value = $7,200,000/(1.18) + $18,000,000/(1.18)
2
- $8,000,000 = $11,029,015.