Question

A project in France yields a series of Euro cash flows as the following:

-600	200	500	300
0	1	2	3

The exchange rate of Euro today is $1.25 per Euro. The inflation rate in the euro zone is € = 3%, the inflation rate in dollars is p$ = 6%. The cost of capital in USD is 10%. Assume that international fisher effect and purchasing power parity holds.

1. Please solve for the project IRR in Euros

2. Solve for the equivalent USD IRR.

3. Please solve for the project NPV in USD

4. Please solve for the project NPV in Euro

Answer 1

Ans 1: At IRR, NPV=0

NPV= Initial investment+ CF1(1+R)^N + CF2(1+R)^N......

R= discounting rate(This is what we need to find)

N= Year

We can find IRR by trial and error method,

Lets assume R= 20%

NPV=600+ 200(1+0.20)^1 +500(1+0.20)^2 +300(1+0.20)^3

By solving this we get NPV=687

Since we need NPV = 600, lets take R=22% (higher the NPV, higher the IRR)

If we use the above formula again we get NPV=664.6 when R=22%

So when we increase the rateby 2% the NPV increases by 22.4 so how much increase in rate do we need for NPV to increase by 87 is what we need to find

so 2*87/22.4=7%

so increase the rate by 7% IRR=27%

Ans2: Convert Euro into $

600Euro*1.25$=750

200Euro*1.25$=250

300Euro*1.25$=375

500Euro*1.25$=625

Follow the same steps as the above solution,

You will get IRR=27.66%

Ans 3:Use the NPV formula and take R=10%