9. The state of Texas has just adopted its own currency, which must be used for all
Question:
9. The state of Texas has just adopted its own currency, which must be used for all commercial transactions occurring within the state. Units of this currency, which are referred to as Lone Star's, have a current exchange rate with the United States dollar of $1.5000/LS1. The general level of prices in Texas is expected increase at 4.0 percent (inflation) per year for the foreseeable future. The rate of inflation in the rest of the United States, which continues to use the dollar as a medium of exchange, is expected to be 2.0 percent per year. Your Oklahoma-based firm is considering a project that requires an immediate investment of LS 4000 (millions). The proposed project will generate cash flows of LS 1000 (millions) per year over the next three years. At the end of three years, you expect that the project will be sold to local interests for LS 2200 (millions). Assuming that the opportunity cost of capital is 10 percent, determine the net present value (in dollars) for the project.
10. Munimula Precision Parts is evaluating a proposal to build an aluminum mini-mill in Germany. Construction of the mini-mill will require an investment of 2.4 billion. The mini-mill is expected to generate sales revenue of 1.5 billion during the project's first year and 2 billion during the second and third years. The mini-mill would be sold to a syndicate of Polish investors after three years, generating after-tax cash flow of 0.80 billion. The variable costs of production are expected to be 40 percent of sales revenue. The tax rate imposed on profits from the mini-mill by the Federal Republic of Germany would be 20 percent. However, Munimula would be allowed to depreciate the entire investment in the mill to a of zero salvage value using straight-line depreciation over a 3-year life. The current spot exchange rate is $1.2000/1. The risk-free interest rate in the US is 2.25 percent and the euro-denominated risk-free rate in Germany is 0.75 percent. Munimula has a required return for risky projects of 10 percent. Assuming the repatriation of after-foreign-tax p