1. The McDonald Manufacturing of Wichita Falls, Texas is evaluating a proposal to open a manufacturing plant in Diekirch, Luxembourg to permit European production and distribution of its products. Construction of the new manufacturing facility would require an initial investment of 480 million (euros). The manufacturing plant would generate after-tax cash flows of 200 million (euros) per year during the first two years (at the end of years 1 and 2). The project is expected to generate after-tax cash flows of 240 million at the end of year 3, the final year of the project's life. The spot exchange rate between the dollar and the euro is $1.1250/1. The risk-free US interest rate is currently 2.0 percent, while the risk-free euro-denominated interest rate is 0.25 percent. Assuming the firm's cost of capital is 9 percent and that the after-tax cash flows from foreign subsidiaries are not taxed in the US, determine whether the McDonald Mfg. should invest in the proposed project. (16 points)

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