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Use the Information to Answer the Following Question(s)

question 17

Multiple Choice

Use the information to answer the following question(s) .
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 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset) . Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years) . The current spot rate is $0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.
-Refer to Instruction 19.1. What is the NPV of the European expansion if Wheel Deal first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

Definitions:

SWOT Analysis

A strategic planning tool that identifies Strengths, Weaknesses, Opportunities, and Threats related to business competition or project planning.

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Environmental Scan

The process of systematically collecting and analyzing external and internal environments to identify trends, opportunities, and threats.

SMART Objectives

Goals that are Specific, Measurable, Achievable, Relevant, and Time-bound, used to guide project management and achievement evaluation.