Copper International is a U.S. based company that would like to invest in a project in Europe. The initial cost of the project is €12 million. It is expected to generate a cash flow of €5.4 million each year in the next three years. The current spot exchange rate is €0.8/$. The current risk-free rates in the United States and Europe are 3 percent and 5 percent, respectively. The cost of capital for Copper on U.S. dollar investments is estimated to be 9 percent. (a) Calculate the projected exchange rate each year over the life of the project. Do you expect the U.S. dollar to appreciate or depreciate relative to the Euro during this period? (b) Calculate the NPV of the project using the home currency approach. (c) Assume that th int foreign currency approach. Fisher ect holds. Calculate the NPV of the project using the (d) You notice that the spot exchange rate for the Swiss franc is SF per $1 = 1.7, and the cross-rate is € per SF = 0.40. Do you think this is a fair rate? Why? If not, what would a fair cross-rate be?

Copper International is a U.S. based company that would like to invest in a project in Europe. The initial cost of the project is €12 million. It is expected to generate a cash flow of €5.4 million each year in the next three years. The current spot exchange rate is €0.8/$. The current risk-free rates in the United States and Europe are 3 percent and 5 percent, respectively. The cost of capital for Copper on U.S. dollar investments is estimated to be 9 percent. (a) Calculate the projected exchange rate each year over the life of the project. Do you expect the U.S. dollar to appreciate or depreciate relative to the Euro during this period? (b) Calculate the NPV of the project using the home currency approach. (c) Assume that th int foreign currency approach. Fisher ect holds. Calculate the NPV of the project using the (d) You notice that the spot exchange rate for the Swiss franc is SF per $1 = 1.7, and the cross-rate is € per SF = 0.40. Do you think this is a fair rate? Why? If not, what would a fair cross-rate be?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter16: Country Risk Analysis

Section: Chapter Questions

Problem 24QA

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