Your company, International Widget Manufacturers, is headquartered in New Orleans, but is considering expanding its operations to France. It will cost €14 million to build a plant in Paris to make widgets, but if you do, you will be able to sell 1.5 million widgets per year for the next seven years. The project ends at that time. During the first year, your widgets will be priced at €3 each. They will cost €1 each to make. The price of the widgets is expected to increase at the rate of 3 percent per year while the cost to produce them is expected to remain constant. The cost to build the plant can be depreciated over the life of the project on a straight-line basis. IWM is in the 35 percent marginal tax bracket (both in France and the U.S.), and its nominal cost of capital in the U.S. is 13%. Based on the International Fisher Effect and the fact that you consider France to be a safe country to invest in, you believe that the real cost of capital for your company is the same both in France and in the U.S. You expect the inflation rate in the U.S. to be 4% per year during the seven years of this project. You expect the inflation rate in France (and throughout Europe) to be 3% per year over the same time period. Today, it costs $1.30 to buy one euro. Find the following:

A. Find the relavent cash flows in euros and use the appropriate euro discount rate to calculate the euro NPV.

B. Using the euro cash flows you calculated above, use Relative Purchasing Power Parity to forcast the dollar/euro exchange rates over the life of this project and convert the euros to dollars. Then use the appropriate U.S. discount rate to find the dollar NPV.

C. Calculate the IRR of this project using the euro cash flows you found in (A) above.

D. Calculate the IRR of this project using the dollar cash flows you found in (B) above.