Athens Waste Disposal (AWD) is trying to decide whether to replace its aged trash compactor with a new, more efficient model. The new trash compactor costs 300,000. The new trash compactor will have an estimated life of 10 years and will be depreciated using the straight line method to zero salvage value. If purchased it is estimated that the new trash compactor will save60,000 annually in cash operating expenses on a before tax basis. Assume the savings will occur at the end of each year. The old trash compactor has a book value of 100,000 and a market value of50,000. The remaining book value is being depreciated on a straight line basis to zero salvage value at the rate of20,000 year. AWD uses a U.S. discount rate of 10% for similar risk projects. AWD is highly profitable and has a corporate tax rate of 40%.
	New Machine Cost	300,000
	Estimated life	10
	Annual pretax cost saving	60,000
	Old Machine book value	100,000
	Old Machine market value	50,000
	U.S. Discount Rate similar risk projects	10.00%
	Tax rate	40.00%
1	Determine the incremental cash flows from the project. Use the template below.
		Year
		0	1	2	3	4	5	6	7	8	9	10
	Total Cash Flows
2	Using the data below, determine the NPV of the potential investment In U.S. Dollars to AWD's U.S. parent company.
	Current direct exchange rate			1.3580	USD/EUR
	Current indirect exchange rate			0.7364	EUR/USD
	Assumed U.S. Inflation rate			2.10%
	Assumed Greece inflation rate			-0.35%
	Current U.S. Discount rate for project of similar risk		10.00%
	Approach 1 - Discount cash flows at discount rate convert to NPV in to $ at spot rate.
	If interest rate parity holds DRf = [(1+DRh)*(1+rf)/(1+rH)]-1
	Where	DR = Discount Rate
		r = expected interest rate
		h = home country
		f = foreign country
		Year
		0	1	2	3	4	5	6	7	8	9	10
	Cash Flow in	0	0	0	0	0	0	0	0	0	0	0
	Discount rate in
	Factor note PV=FV/(1+R)^N
	Present Value in
	NPV in
	NPV in $
	Approach 2 - Convert Cash flows to $, discounted at the $ discount rate
	Expected future exchange rate = (indirect Spot rate)[(1+rf)/1+rh)]t
		Year
		0	1	2	3	4	5	6	7	8	9	10
	Cash flows in	0	0	0	0	0	0	0	0	0	0	0
	Projected Exchange Rate
	Cash flows in $
	Discount rate in $
	Discount Factor
	Present Value in $
	NPV in $