Reference no: EM132494487

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.