8 (Chapter 22) OSavedHelpIt is 2024 and Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates areGermany and Switzerland. The forecast cash flows from the proposed plants are as follows:COC1*C2C3C4C5C6IRR (8)Germany (millions of euros)Switzerland (millions of Swissfrancs)-77+13+18+18+23+23+2312.5-137+23+33+33+38+38+3811.6The spot exchange rate for euros is USD1.4 = EUR1, while the rate for Swiss francs is CHF1.6 = USD1. The interest rate is 6% in theUnited States, 3% in Switzerland, and 5% in the euro countries. The financial manager has suggested that if the cash flows were statedin dollars, a return in excess of 12% would be acceptable.a. What is the dollar NPV of the German project?b. What is the dollar NPV of the Swiss project?c. Should the company go ahead with the German project, the Swiss project, or neither?(For requirements a & b, do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)milliona.NPV of German projectmillionb.NPV of Swiss projectC.The company should choose4 of 4Nex< Prev

The net present value is used as a measure of the profitability of a project by discounting future…

Answered: It is 2024 and Carpet Baggers Inc. is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 22P

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Company X has an investment opportunity in Europe. The project costs €30,000,000 and is expected to produce cash flows of €21,000,000in Year 1, €31,000,000 in Year 2 and €22,000,000 in Year 3. The current exchange rate is €1.25% and the current risk free rate in United States is 5% compared to that of Europe of 3.5%. The appropriate discount rate for the project is estimated to be 13% the U.S. cost of capital for the company. In addition the subsidiary can be sold at the end of three years for an estimated €6,250,000. a. What is the NPV of the project? *Use the Home Currency Approach to calculate the NPV.
(a) Jireh Housing Limited is a UK based property developer and is considering a project in Ghana which would require an outlay of £1.6 million at the outset. The money cash flows receivable from sales will depend on the specific inflation rate for Jireh property. This is anticipated to be 4% per annum. Cash outflows consist of four elements: labour, materials, overheads, and machinery maintenance. Labour costs are expected to increase by 5% per annum, materials by 3%, overheads by 4%, and machinery maintenance by 1%. Jireh’s requires a real rate of return of 16% on projects of this risk class, and anticipates the general rate of inflation to be 2% per annum over the 3-year life of the project. Annual cash flows in present (Time 0) prices are as follows: £m InflationSales 3.4 4%Labour 0.8…
Micheal’s Machinery is a German multinational manufacturing company. Currently, Micheal’s financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2000 and a cash inflow the following year of $2400. Micheal’s estimates that its risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 0.7 Germany. In addition, 1-year risk-free securities in the United States are yielding 6.5%, while similar securities in Germany’s are yielding 4.5%. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? Round your answers to two decimal places. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places. If Micheal undertakes the project, what is the net present value and rate of return of…
Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and political conditions. The spot rate of the Argentina peso in 1 year is expected to be $.40 based on these conditions. However, it wants to also account for the 10 percent probability of a political crisis in Argentina, which would change the expected cash flows to 4 million Argentine pesos in 1 year. In addition, it wants to account for the 20 percent probability that the exchange rate may only be $.36 at the end of 1 year. These two forms of country risk are independent. Drysdale’s required rate of return is 25 percent and its initial outlay for this project is $1.4 million. Show the distribution of possible outcomes for the project’s net present value (NPV).
International Foods Corporation, a U.S.-based food company, is considering expanding its soup-processing operations in Switzerland. The company plans a net investment of $7 million in the project. The current spot exchange rate is SF5.5 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF6 million for 12 years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 19 percent. Calculate the net present value of the proposed expansion project. Use Table IV to answer the questions below. Enter your answer in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answer to two decimal places.
1: Mars Technologies is considering setting up a plant in a foreign country. The plant will have an estimated useful life of 4 years and the estimated costs of setting it up are $20 million. The company’s CFO has estimated the following cash flows associated with the new plant: Year 1 = $5.8 million Year 2 = $7.9 million Year 3 = $8.6 million Year 4 = $10.5 million The company is concerned about its current exports to the foreign country, which are expected to be reduced by $1,200,000 for each of the 4 years. Given that the company’s required rate of return is 12%, what is the NPV of the project? Q#2: Jupiter Inc.’s directors are considering expanding their operations in foreign markets. They estimate that the cost of expansion is approximately $42 million. The company’s CFO has estimated that new foreign operations will generate the following cash flows: Year 1 = $2,120,000 Year 2 = $2,838,000 Year 3 = $3,480,000 Year 4 = $4,570,000 Year 5 onward, the cash flow stream is going to…
Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar denominated cash flows consist of initial investment of $2,000 and a cash inflow the year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 US dollar will buy 0.91 Swiss franc. In addition, 1 year risk free securities in the US are yielding 3% while similar securities in Switzerland are yielding 1.50% a) If this project was instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital what would be the net present value and rate of return generated by this project?
Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,600. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,280, 5,080, 6,070, 7,060, and 7,900. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. c. Are the two dollar NPVs different or the same? multiple choice Different Same d. What is the NPV in dollars if the actual pattern of ZAR/USD exchange…
"The par-ent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this business are very low, Nester Co. expects this business to generate large cash flows in Swiss francs that will be remitted to the parent each year. Nester will finance half of this project with debt. It has these choices for financing the project: ■obtain half of the funds needed from parent equityand the other half by borrowing dollars, ■obtain half of the funds needed from parent equity and the other half by borrowing Swiss francs, or ■obtain half of the funds that are needed from parent equity and obtain the remainder by borrowing an equal amount of dollars and Swiss francs.The interest rate on dollars is the same as the interest rate on Swiss francs. a. Which choice will result in the most exchange rate exposure? b. Which choice will result in the least exchange rate exposure? c. If the Swiss franc were expected to…
Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR11,200. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,360, 4,360, 5,350, 6,340, and 7,300. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. Are the two dollar NPVs different or the same? multiple choice Different Same 4.What is the NPV in dollars if the actual pattern of ZAR/USD exchange rates is: S(0) = 3.75, S(1) =…
International Foods Corporation, a U.S.-‐based food company, is considering expanding its soup-‐processing operations in Switzerland. The company plans a net investment of $8 million in the project. The current spot exchange rate is SF6.25 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF5 million for 10years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 16 percent. Calculate the net present value of the proposed expansion project.
Sandrine Machinery is a Swiss multinational manufacturingcompany. Currently, Sandrine’s financial planners are considering undertaking a 1-yearproject in the United States. The project’s expected dollar-denominated cash flows consistof an initial investment of $2,000 and a cash inflow the following year of $2,400. Sandrineestimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding3%, while similar securities in Switzerland are yielding 1.50%.a. If this project was instead undertaken by a similar U.S.-based company with the samerisk-adjusted cost of capital, what would be the net present value and rate of returngenerated by this project?b. What is the expected forward exchange rate 1 year from now?c. If Sandrine undertakes the project, what is the net present value and rate of return ofthe project for Sandrine?

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