Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up:
Yr 0 = - €64,000 Yr 1 = €160,000 Yr 2 = - €100,000
The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.
a. What is the dollar-denominated IRR of this project?
b. What is the euro-denominated IRR of this project?
c. Find the euro-zone cost of capital to compute is the dollar-denominated NPV of this project.
d. Find the dollar cash flows to compute the dollar-denominated NPV of this project. Please note that your answer MUST contain currency symbols.