Reference no: EM132444217

Problem: ABC Coal INC., a U.S. based company, is considering expanding its operations into a European country which is very unstable due to political problems. The required investment at Time = 0 is $650,000. The firm forecasts total cash inflows of €100,000 per year for 2 years, €200,000 for the next 2 years, and then a possible terminal value of €500,000 in year 5. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only €250,000 and a 50% chance that it will be €500,000. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen's cost of capital is 12.5%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Currently a € is trading for $1.31 and the forecasted exchange rate between dollar and euro for year 1, 2,3,4 & 5 will be $1.34, $1.36, $1.30, $1.45 and $1.5 respectively. Under these conditions:

Required:

A. What is the project's NPV?

B. Find IRR.

C. Should you accept the project? Why or Why not? Explain fully.