Should the company go ahead with either project? What is the NPV of the projects? If it must choose between them, which should it take?  The table is attached to this question. Be comprehensive when Justifying your answer. Thank you.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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arpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows:

 

 

The spot exchange rate for euros is $1.3/€, while the rate for Swiss francs is CHF 1.5/$. The interest rate is 5% in the United States, 4% in Switzerland, and 6% in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10% would be acceptable. 

 

  • Should the company go ahead with either project? What is the NPV of the projects? If it must choose between them, which should it take?  The table is attached to this question. Be comprehensive when Justifying your answer. Thank you.
### Cash Flow and Internal Rate of Return (IRR) Analysis

This table presents the cash flows and corresponding internal rate of return (IRR) for two countries, Germany and Switzerland, expressed in millions of their respective currencies.

#### Table Columns:
- **C₀ to C₆:** Represents annual cash flows for seven consecutive years.
- **IRR (%):** Denotes the internal rate of return for the project in each country.

#### Cash Flows:

**Germany (in millions of euros):**
- Year 0 (C₀): -60
- Year 1 (C₁): +10
- Year 2 (C₂): +15
- Year 3 (C₃): +15
- Year 4 (C₄): +20
- Year 5 (C₅): +20
- Year 6 (C₆): +20
- **IRR:** 15.0%

**Switzerland (in millions of Swiss francs):**
- Year 0 (C₀): -120
- Year 1 (C₁): +20
- Year 2 (C₂): +30
- Year 3 (C₃): +30
- Year 4 (C₄): +35
- Year 5 (C₅): +35
- Year 6 (C₆): +35
- **IRR:** 12.8%

The IRR is a crucial metric used to evaluate the profitability of potential investments. It represents the rate at which the net present value of all cash flows (both inflow and outflow) for a specific project equals zero. In this analysis, Germany's project shows a higher IRR compared to Switzerland's, suggesting a potentially more profitable investment.
Transcribed Image Text:### Cash Flow and Internal Rate of Return (IRR) Analysis This table presents the cash flows and corresponding internal rate of return (IRR) for two countries, Germany and Switzerland, expressed in millions of their respective currencies. #### Table Columns: - **C₀ to C₆:** Represents annual cash flows for seven consecutive years. - **IRR (%):** Denotes the internal rate of return for the project in each country. #### Cash Flows: **Germany (in millions of euros):** - Year 0 (C₀): -60 - Year 1 (C₁): +10 - Year 2 (C₂): +15 - Year 3 (C₃): +15 - Year 4 (C₄): +20 - Year 5 (C₅): +20 - Year 6 (C₆): +20 - **IRR:** 15.0% **Switzerland (in millions of Swiss francs):** - Year 0 (C₀): -120 - Year 1 (C₁): +20 - Year 2 (C₂): +30 - Year 3 (C₃): +30 - Year 4 (C₄): +35 - Year 5 (C₅): +35 - Year 6 (C₆): +35 - **IRR:** 12.8% The IRR is a crucial metric used to evaluate the profitability of potential investments. It represents the rate at which the net present value of all cash flows (both inflow and outflow) for a specific project equals zero. In this analysis, Germany's project shows a higher IRR compared to Switzerland's, suggesting a potentially more profitable investment.
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