Global Electronics Inc. invested $ 1,000,000 to build a plant in a foreign country. The labor and materials used in production are purchased locally. The plant expansion was estimated to produce an internal rate of return of 20% in U. S. dollar terms. Due to a currency crisis, the currency exchange rate between the local currency and the U. S. dollar doubled from two local units per U. S. dollar to four local units per U. S. dollar.
a. Assume that the plant produced and sold product in the local economy. Explain what impact this change in the currency exchange rate would have on the project’s internal rate of return.
b. Assume that the plant produced product in the local economy but exported the product back to the United States for sale. Explain what impact the change in the currency ex-change rate would have on the project’s internal rate of return under this assumption.