Swingle company should invest in the proposed project

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Reference no: EM132020198

The C. W. Swingle Company of Lincoln, Nebraska 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 €240 million (euros). The manufacturing plant would generate after-tax cash flows of €100 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 €120 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 $1.2500/€1. The risk-free US interest rate is currently 2.5 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 Swingle Company should invest in the proposed project.

Reference no: EM132020198

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