The firm purchases a ship to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a ship operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver. The firm is contemplating the following: Acquisition cost € 1,000,000 Years of useful life (economic life) 5 Tax rate 0% Required rate of return on equity 10% Annual revenues € 2,000,000 Operating expenses include only: “Other expenses” of € 1,500,000, plus depreciation. The current exchange rates for USD/EUR: Time 0 1 2 3 4 5 USD per EUR $1.10/ €1 $1.13/ € $1.15/€ 1 $1.17/€1 $1.19/€1 $1.22/€1 Terminology “Spot” price for the Euro, “today” (from Bloomberg) Forward/Futures prices (from futures curve at Chicago Mercantile Exchange) Note: these are also expected spot prices at these dates in the future, via Rational Expectations. Tips: 1. Depreciate straight-line over the years of useful life down to € 0. The ship will be disposed of at end of the fifth year at no cost. 2. The maximum dividend is paid annually. Euros are exchanged for dollars to repatriate the cashflows to payout as dividends. 3. Ignore any working capital effects. Question: CASHFLOW ANALYSIS: convert Euros to U.S. dollars
The firm purchases a ship to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a ship operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver.
The firm is contemplating the following:
Acquisition cost € 1,000,000
Years of useful life (economic life) 5
Tax rate 0%
Required rate of
Annual revenues € 2,000,000
Operating expenses include only: “Other expenses” of € 1,500,000, plus
The current exchange rates for USD/EUR:
|
Time |
0 |
1 |
2 |
3 |
4 |
5 |
|
USD per EUR |
$1.10/ €1 |
$1.13/ € |
$1.15/€ 1 |
$1.17/€1 |
$1.19/€1 |
$1.22/€1 |
|
Terminology |
“Spot” price for the Euro, “today” (from Bloomberg) |
Forward/Futures prices (from futures curve at Chicago Mercantile Exchange) Note: these are also expected spot prices at these dates in the future, via Rational Expectations. |
Tips:
1. Depreciate straight-line over the years of useful life down to € 0. The ship will be disposed of at end of the fifth year at no cost.
2. The maximum dividend is paid annually. Euros are exchanged for dollars to repatriate the cashflows to payout as dividends.
3. Ignore any working capital effects.
Question:
- CASHFLOW ANALYSIS: convert Euros to U.S. dollars
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