Project
Project description
Grade: 10%
This is a project to solidify the concepts on Purchasing Power Parity relationship and multinational capital budgeting. You are required to use Spreadsheet to perform your analysis.
Please submit your completed project online by the due date. You can submit your project by using Blackboard: either email or submit it using this assignment tab.
?The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000. The new product line is expected to increase net revenues by euro 300,000 for the next 10 years. The equipment is multipurpose and the firm anticipates that they will sell it at the end of the 10th year for euro 500,000. The initial investment (at year 0) also requires an increase in Net Working Capital of euro 100,000 (to be recovered at the end of 10th year). The current spot rate is $0.95/euro, and the expected inflation rate in the U.S. is 2% per year and 5% per year in Europe.
Use Spreadsheet to carry out the following calculations (show your formulas in each cell):
i. Based on the relative version of purchasing power parity relationship, calculate the expected appreciation/depreciation in euro and forecast the expected exchange rate for the next 10 years.
ii. Develop the timeline of cash flows (years 0 – 10) in euros
iii. Use the spot exchange rate and your forecasted exchange rate to calculate the timeline
of future cash flows (years 0-10) in dollar terms.
iv. Compute the IRR of the project
v. Compute the NPV of the project at discount rates of (a) 8% (b) 9% (c) 11% (d) 14%.
vi. Plot in graph (you can use scatter with smooth lines option) the Net Present Values at
above mentioned discount rates and show the IRR in the graph.
vii. Based on IRR and NPV calculations, comment if the project is acceptable or not at
the above discount rates.
The project is aimed to test the following four calculations:
You have to develop the timeline in euro terms. Note that in year 0, there is an additional installation cost of 300,000 and increase in NWC of 100,000. This 100,000 will be recovered in the year 10.
You should be able to use the formula of Purchasing Power Parity to forecast the exchange rates. Be careful with the way in which you use this formula. What goes in numerator and denominator is important. This depends on the way exchange rate is given. Incorrect exchange rates will make the entire calculation wrong.
The most important step is to whether multiply or divide the exchange rates with cash flows in euros to get dollars. Figure this out and convert the euros into dollars.
Lastly, use Spreadsheet to calculate the NPV at 4 discount rates; IRR and plot.
I am posting a small video lecture on how to calculate NPV and IRR using Microsoft Excel. I would recommend you to use Excel even in the examination. This would make your calculations extremely fast.
http://uhdmediasite.uhd.edu/Mediasite/Play/b7591f90891f41d29ce9433d308a4f9d1d