A German company manufactures a specialized piece of equipment and leases it to a U.K. enterprise. The lease calls for five end-of-year payments of £1.1 million. The German firm spent €3.8 million to produce the equipment, which is expected to have no salvage value after five years. The current spot rate is €1.3/£. The risk-free interest rate is 3% in Germany and is 5% in the United Kingdom. The German firm reasons that the appropriate (German) discount rate for this investment is 7%. Calculate the NPV of this investment in two ways. ,,,a.Convert all cash flows to pounds and then discount at an appropriate (U.K.) cost of capital. Round your answer to the nearest whole pound. ,£ ,,Convert the resulting NPV to euros at the spot rate. Round your answer to the nearest whole euro.,€ ,,,b.Calculate forward rates for each year, convert the pound-denominated cash flows into euros using those rates, and then discount the cash flows at the German cost of capital. Round your answer to the nearest whole euro.,€ ,
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