What is the euro-denominated IRR

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Reference no: EM132302171

Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States.

The project involves selling widgets: you project a sales volume of 50,000 widgets per year, sales price of $20 per widget with a contribution margin of $15 per widget.

The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years). Salvage value for the equipment is projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the start of each year.

The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S.

For simplicity, assume that taxes are paid like sales taxes: immediately.

The spot exchange rate is $1.50 = €1.00. The cost of capital to the Irish firm for a domestic project of this risk is 8 percent. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.

What is the euro-denominated IRR?

Reference no: EM132302171

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