NPV of Partially Hedged Project Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and development of this equipment. It expects to receive 600,000 euros in one year from selling the products in Portugal, where it already does much business. In addition, it expects to receive 300,000 euros in one year from sales to Spain, but these cash flows are very uncertain because Sazer has no existing business in Spain. Today’s spot rate of the euro is $1.50, and the one-year forward rate is $1.50. Sazer expects that the euro’s spot rate will be $1.60 in one year. It will pursue the project only if it can satisfy its required rate of return of 24 percent. It decides to hedge all the expected receivables due to business in Portugal but none of the expected receivables due to business in Spain. Estimate the net present value of the project.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 14, Problem 32QA
Textbook Problem

NPV of Partially Hedged Project Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and development of this equipment. It expects to receive 600,000 euros in one year from selling the products in Portugal, where it already does much business. In addition, it expects to receive 300,000 euros in one year from sales to Spain, but these cash flows are very uncertain because Sazer has no existing business in Spain. Today’s spot rate of the euro is $1.50, and the one-year forward rate is $1.50. Sazer expects that the euro’s spot rate will be $1.60 in one year. It will pursue the project only if it can satisfy its required rate of return of 24 percent. It decides to hedge all the expected receivables due to business in Portugal but none of the expected receivables due to business in Spain. Estimate the net present value of the project.

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