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Use the Information to Answer the Following Question(s)

question 18

Multiple Choice

Use the information to answer the following question(s) .
The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, 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 €1,200,000 and additional installation of €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 €600,000 per year over current levels for the next 5 years, however; expenses will also increase by €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 €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 €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 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

Definitions:

Psychosexual Stages

Psychosexual stages are a series of developmental phases in psychoanalytic theory, proposed by Freud, that children pass through, each characterized by different modes of seeking pleasure.

Body Parts

Various anatomical components of living organisms, including limbs, organs, and tissues, that perform specific functions necessary for life and activity.

Oral Stage

The first stage in Freud's psychosexual development, where an infant's pleasure centers on the mouth.

Psychosexual Development

A Freudian theory that proposes human personality development occurs in five stages (oral, anal, phallic, latency, and genital) from infancy to adulthood, centered on the libido's focus.