A U.S. company is considering a high-technology project in a foreign country. The estimated economic results for the project (after taxes), in the foreign currency (T-marks), is shown in the following table for the seven-year analysis period being used. The company requires an 18% rate of return in U.S. dollars (after taxes) on any investments in this foreign country.
End of Year Cash Flow (T-marks after Taxes)
0...............................-3,600,000
1..................................450,000
2...............................1,500,000
3...............................1,500,000
4...............................1,500,000
5...............................1,500,000
6...............................1,500,000
7...............................1,500,000
a. Should the project be approved, based on a PW analysis in U.S. dollars, if the devaluation of the T-mark, relative to the U.S. dollar, is estimated to average 12% per year and the present exchange rate is 20 T-marks per dollar?
b. What is the IRR of the project in T-marks?
c. Based on your answer to (b), what is the IRR in U.S. dollars?