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). 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.
The corporate tax rate is 12½% in Ireland and 40% 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 is 8%. The U.S. risk-free rate is 3%; the Irish risk-free rate is 2%.
a. What is CF0 in dollars?
b. What is CF1 in dollars?
c. What is CF5 in dollars?
d. What is the NPV of the U.S.-based project to the Irish firm?
e. What is the dollar-denominated IRR?
f. What is the euro-denominated IRR?
g. Find the break-even price (in dollars) and break-even quantity for the U.S. project.