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6. Italian Fiat Corporation (Fiat-EU) is evaluating whether to build a diesel engine plant in the UK (Fiat-UK). The estimated project after tax operating cash flows in millions GBP are below:

6. Italian Fiat Corporation (Fiat-EU) is evaluating whether to build a diesel engine plant in the UK (Fiat-UK). The estimated project after tax operating cash flows in millions GBP are below:

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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6. Italian Fiat Corporation (Fiat-EU) is evaluating whether to build a diesel engine plant in the UK (Fiat-UK). The estimated project after tax operating cash flows in millions GBP are below: Years 0. 1 2 3 4 5+ -26.5 2.2 3.3 5.6 6.3 6.3 19 The optimal capital structure is 80% equity and 20% debt. GBP is expected to depreciate by 2% per year vis-à-vis Euro. Depreciation expense is 5 million GBP during first 5 years. Today's exchange rate is £1.15 per euro. The applicable marginal tax rate in the UK and Italy 35%, borrowing rate in Italy is 5% and 4% in GBP, the unlevered cost of equity is 7%. Fiat borrows in the Italian market to finance the project. Should Fiat undertake the project using APV approach?
Transcribed Image Text:6. Italian Fiat Corporation (Fiat-EU) is evaluating whether to build a diesel engine plant in the UK (Fiat-UK). The estimated project after tax operating cash flows in millions GBP are below: Years 0. 1 2 3 4 5+ -26.5 2.2 3.3 5.6 6.3 6.3 19 The optimal capital structure is 80% equity and 20% debt. GBP is expected to depreciate by 2% per year vis-à-vis Euro. Depreciation expense is 5 million GBP during first 5 years. Today's exchange rate is £1.15 per euro. The applicable marginal tax rate in the UK and Italy 35%, borrowing rate in Italy is 5% and 4% in GBP, the unlevered cost of equity is 7%. Fiat borrows in the Italian market to finance the project. Should Fiat undertake the project using APV approach?
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