Question: The Brankton Company an American firm considers investing in Spain
The Brankton Company, an American firm, considers investing in Spain. The investment will cost €125 million and is expected to generate, after taxes, €30 million a year during the next five years in real terms, that is, before inflation. The project would be liquidated at the end of the fifth year, and its terminal value is estimated at €30 million. The annual rate of inflation is expected to be 3 percent in the Euro-zone and 4 percent in the United States. The cost of capital used by Brankton for its investments in the Euro-zone is 7 percent above the yield on government bonds. Currently, the rate on U.S. government bonds is 5 percent and the exchange rate is EUR/USD 0.80. Calculate the net present value of the project in U.S. dollars.
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