Question

Zimmer, a manufacturer of modular rooms, plans to expand its operations in Landshut, Germany. The expansion will cost $14.5 million and is expected to generate annual net cash flows of €2.15 million for a period of 12 years and then the operation will be sold for €1 million (net of taxes). The cost of capital for the project is 14%. Using a spot exchange rate of $1.25/€ as the forecast FX rate for the euro for the term of the project, compute the NPV of this expansion project. Please explain answer in detail

Answer 1

Year	Cash flow	Exhange rate	Cash flow (In $ million)	Discount factor @ 14%	Present Value
0	-14.5	1	-14.5	1.0000	-14.5000
1	2.15	1.25	2.6875	0.8772	2.3575
2	2.15	1.25	2.6875	0.7695	2.0679
3	2.15	1.25	2.6875	0.6750	1.8140
4	2.15	1.25	2.6875	0.5921	1.5912
5	2.15	1.25	2.6875	0.5194	1.3958
6	2.15	1.25	2.6875	0.4556	1.2244
7	2.15	1.25	2.6875	0.3996	1.0740
8	2.15	1.25	2.6875	0.3506	0.9421
9	2.15	1.25	2.6875	0.3075	0.8264
10	2.15	1.25	2.6875	0.2697	0.7249
11	2.15	1.25	2.6875	0.2366	0.6359
12	3.15	1.25	3.9375	0.2076	0.8173
					0.9715
	NPV of the project is $ 0.9715 million