our firm is based in Germany and is considering an investment opportunity in the United States.
The project will last for 2 years and require an investment of USD 1,000,000 at time zero. This initial investment has to be depreciated by 60% the first year and the remaining 40% in the second year. Revenues
are forecasted to be USD 1,000,000 and USD 1,500,000 in year 1 and year 2, respectively. Costs will amount to USD 500,000 in both years. Terminal value is expected to be zero.
Additional information: tax rate is 30% in US and 35% in Germany. Current
spot exchange rate is S (USD/EUR) = USD/EUR 1.5. Inflation rate in Germany is 1% and in the US is 2.5%.
Compute the NPV of the project in EUR using the WACC as discount rate. Assume the WACC in EUR to be 4%. Should the German company accept or reject the project?