Zimmer, a manufacturer of modular rooms, plans to expand its operations in Landshut, Germany. The expansion...

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. Convert the annual cash flow to Dollars before discounting and give your answer in Dollars.

Expert Solution

Calculation of NPV of the Expansion Project
Year	Euro Cash Flows	Exchange rate ($/€)	Dollar Cash Flows	Discount Factor @14%	Discounted Cash Flows
A	B	C	*D = BC**	E = 1/(1+14%)^A	*F = DE**
0	-14,500,000	1	-14500000	1	-14500000
1	2150000	1.25	2687500	0.877192982	2357456.14
2	2150000	1.25	2687500	0.769467528	2067943.983
3	2150000	1.25	2687500	0.674971516	1813985.95
4	2150000	1.25	2687500	0.592080277	1591215.745
5	2150000	1.25	2687500	0.519368664	1395803.285
6	2150000	1.25	2687500	0.455586548	1224388.847
7	2150000	1.25	2687500	0.399637323	1074025.304
8	2150000	1.25	2687500	0.350559055	942127.4599
9	2150000	1.25	2687500	0.307507943	826427.5964
10	2150000	1.25	2687500	0.26974381	724936.4881
11	2150000	1.25	2687500	0.236617377	635909.2001
12	3150000	1.25	3937500	0.207559102	817263.9658
NPV					971483.9653
Therefore, NPV of the expansion project is $971,483.97

jeff jeffy answered 1 year ago

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