The wheel deal inc., a company that produces scooters and other
The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized
recreational equipment is considering an expansion of their product line to Europe. The
expansion would require a purchase of equipment with a price of euro 1,200,000 and additional
installation of euro 300,000. The new product line is expected to increase net revenues by euro
300,000 for the next 10 years. The equipment is multipurpose and the firm anticipates that they
will sell it at the end of the 10th
year for euro 500,000. The initial investment (at year 0) also
requires an increase in Net Working Capital of euro 100,000 (to be recovered at the end of 10th
year). The current spot rate is $0.95/euro, and the expected inflation rate in the U.S. is 2% per
year and 5% per year in Europe.
Use Spreadsheet to carry out the following calculations (show your formulas in each cell):
i. Based on the relative version of purchasing power parity relationship, calculate the
expected appreciation/depreciation in euro and forecast the expected exchange rate
for the next 10 years.
ii. Develop the timeline of cash flows (years 0 – 10) in euros
iii. Use the spot exchange rate and your forecasted exchange rate to calculate the timeline
of future cash flows (years 0-10) in dollar terms.
iv. Compute the IRR of the project
v. Compute the NPV of the project at discount rates of (a) 8% (b) 9% (c) 11% (d) 14%.
vi. Plot in graph (you can use scatter with smooth lines option) the Net Present Values at
above mentioned discount rates and show the IRR in the graph.
vii. Based on IRR and NPV calculations, comment if the project is acceptable or not at
the above discount rates.