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MSDI
In addition to answering the questions below, an Excel Spreadsheet needs to be completed for this assignment. Please include a printout of the spreadsheet along with your answers to any questions (below) which are not easily seen on the spreadsheet. If you need more than one worksheet to complete the steps below, please turn in printouts of all your spreadsheets with this assignment.
Steps/Questions
1.
Assuming that the U.S. inflation rate is expected to be a constant 4% and the U.S. nominal WACC is 13%, use the International Fisher Effect (real interest rates are the same in all countries at any one time) to calculate the Spanish nominal WACC.
2.
Calculate the cash flow from the after-tax cost savings from the new equipment in years 1-10 (from exhibit 2 in the case).
3.
Calculate the cash flow from the loss of the depreciation tax shield of the old equipment.
4.
Calculate the after-tax salvage value of the old equipment
5.
Calculate the depreciation tax shield from the new equipment.
6.
Calculate the NPV (in pesetas) of this project.
7.
Using Relative Purchasing Power Parity, determine the expected exchange rate for each of the next ten years.
8.
Calculate the dollar cash flows based on the exchange rates you came up with.
9.
Calculate the NPV (in dollars) of this project.
10.
Look at the NPVs you calculated in pesetas and in dollars. Look at the current peseta/dollar exchange rate. Based on this exchange rate, is one NPV higher than the other, or are they both the same? How do you interpret these results?

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