For Ityesi Inc.s U.K. project example in Table 23.2, assume all sales actually occur in the United

Question:

For Ityesi Inc.’s U.K. project example in Table 23.2, assume all sales actually occur in the United States and are projected to be $60 million per year for four years. The risk-free rate on dollars is 4% and the risk-free rate on pounds is 7%. Ityesi’s WACC is 7.25%. The current spot exchange rate is $1.30 per pound. The tax rate is 25% in both countries. Keep all of the other assumptions embedded in Table 23.2 and calculate the NPV of the investment opportunity. As discussed in the text, there are multiple ways to handle analyses that have both foreign and domestic cash flows. The most straightforward way to perform this analysis is to convert the pound expenses to dollars using forward rates and combine them with the dollar revenues and expenses to compute dollar EBIT. Also remember that when the EBIT is negative the resulting negative taxes are added to EBIT when calculating FCF because they are tax shields. Assume all tax shields are used in the current year and are not carried forward.

In Table 23.2