Question

SweetAir, Inc. is a U.S. corporation that sells compressed air tanks. Loelife, A.G. is a German firm that manufactures air tanks, and submitted an attractive contract that offered dollar pricing. SweetAir is intrigued by the possibility of locking in long-term dollar prices from a low-cost foreign supplier. Consider the discounted expected value of the 10-year contract that Loelife may sign with Swee- tAir. In the initial year of the deal, Lowlife sells an air tank to SweetAir for $400. It costs €696 to produce an air tank. The current exchange rate is €2/$. Assume that 15,000 air tanks will be sold the first year. For simplicity, also assume that accepting the SweetAir project will not require any major capital expenditures by Loelife. The other relevant information is: • The demand for air tanks is expected to grow at 5% for the second year, 4% for the third and fourth years, and 3% for the remaining life of the contract. • Euro-denominated costs are expected to increase at the euro rate of annual inflation of 2%. • The base dollar price of the air tank will be increased at the U.S. rate of inflation, which is expected to be 4% annually. The German corporate income tax rate is 50%. • The appropriate euro weighted average cost of capital for the project is 17% annually. • Loelife typically establishes an account receivable for its customers. At any given time, the stock of the account receivable is expected to equal 10% of a given year's revenue. Can you determine the net present value (NPV) of the contract to the Loelife? Show all the steps you think necessary.