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Valuing Metallwerke's Contract with Safe Air, Inc. Consider the discounted expected value of the 10 year contract that Metallwerke may sign with Safe...
Valuing Metallwerke's Contract with Safe Air, Inc.Consider the discounted expected value of the 10 year contract that Metallwerke may sign with Safe Air in Chapter 9. In the initial year of the deal, Metallwerke sells an air tank to Safe Air for $400. It coses EUR238 to produce air tank. The current exchange rate is $1.40/Euro. Assume that 15,000 air tanks will be sold the first year. Make the following other assumptions in your valuation:A. The demand for air tanks is expected to grow 1t 5% for the second year, 4% for the third and fourth years, and 3% for the remaining life of the contract.B. euro-denominated costs are expected to increase at the Euro rate inflation of 2%.C. The base dollar price of the air tank will be increased at the U.S. rate of inflation plus one-half of any rea depreciation of the dollar relative to the Euro, but the base dollar price will be reduced by one-half of any appreciation of the dollar relative to the Euro. The U.S. rate of inflation is expected to be 4%.D. The dollar is currently not expected to strengthen or weaken in real terms relative to th eEuro.E. The German corporate income tax rate is 30%F. The appropriate Euro discount rate for the project is 12%G. Metallwerke typically establishes an account receivable for its customers. At any given time, the stock of the account receivable is expected to equal 10% of given year's revenue.H. Accepting the Safe Air project will not require any major capital expenditures by Metallwerke.Can you determone the value of the contract to Metallwerke?
