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A German company manufactures a specialized piece of equipment and leases it to a U.K. enterprise. The

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A German company manufactures a specialized piece of equipment and leases it to a U.K. enterprise. The lease calls for five end-of-year payments of £1.1 million. The German firm spent €3.8 million to produce the equipment, which is expected to have no salvage value after five years. The current spot rate is €1.3/£. The risk-free interest rate is 3% in Germany and is 5% in the United Kingdom. The German firm reasons that the appropriate (German) discount rate for this investment is 7%. Calculate the NPV of this investment in two ways. 

a. Convert all cash flows to pounds and then discount at an appropriate (U.K.) cost of capital. Round your answer to the nearest whole pound £ 

Convert the resulting NPV to Euros at the spot rate. Round your answer to the nearest whole Euro.

b. Calculate forward rates for each year, convert the pound-denominated cash flows into Euros using those rates, and then discount the cash flows at the German cost of capital. Round your answer to the nearest whole euro.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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a Projected Cash flows Years 0 1 2 3 4 5 Cash flows 38 11 11 11 11 11 hence euro to pound spot rate ...View the full answer


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Introduction to Corporate Finance

Introduction to Corporate Finance

ISBN: 978-0324657937

2nd edition

Authors: Scott B. Smart, William L Megginson

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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