# Sensitivity of NPV to Conditions Burton Co., based in the United States, considers a project in which it has an initial outlay of \$3 million and expects to receive 10 million Swiss francs in one year. The spot rate of the Swiss franc is \$0.80. Burton Co. decides to purchase put options on Swiss francs with an exercise price of \$0.78 and a premium of \$0.02 per unit to hedge its receivables. It has a required rate of return of 20 percent. Determine the net present value of this project for Burton Co. based on the forecast that the Swiss franc will be valued at \$0.70 at the end of one year. Assume the same information as in part (a), but with the following adjustment: Although Burton expected to receive 10 million Swiss francs, assume that Switzerland unexpectedly experienced weak economic conditions after Burton initiated the project. Consequently, Burton received only 6 million Swiss francs at the end of the year. Also assume that the spot rate of the Swiss franc at the end of the year was \$0.79 Determine the net present value of this project for Burton Co. if these conditions occur.

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 14, Problem 30QA
Textbook Problem

## Sensitivity of NPV to Conditions Burton Co., based in the United States, considers a project in which it has an initial outlay of \$3 million and expects to receive 10 million Swiss francs in one year. The spot rate of the Swiss franc is \$0.80. Burton Co. decides to purchase put options on Swiss francs with an exercise price of \$0.78 and a premium of \$0.02 per unit to hedge its receivables. It has a required rate of return of 20 percent. Determine the net present value of this project for Burton Co. based on the forecast that the Swiss franc will be valued at \$0.70 at the end of one year. Assume the same information as in part (a), but with the following adjustment: Although Burton expected to receive 10 million Swiss francs, assume that Switzerland unexpectedly experienced weak economic conditions after Burton initiated the project. Consequently, Burton received only 6 million Swiss francs at the end of the year. Also assume that the spot rate of the Swiss franc at the end of the year was \$0.79 Determine the net present value of this project for Burton Co. if these conditions occur.

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