Chapter 16, Problem 23QA

FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinationalmanufacturing company. Currently, Sandrine’s financial planners are consideringundertaking a 1-year project in the United States. The project’s expected dollardenominated cash flows consist of an initial investment of $2,000 and a cash inflow thefollowing year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%.Currently, 1 U.S. dollar will buy 0.94 Swiss franc. In addition, 1-year risk-freesecurities in the United States are yielding 3%, while similar securities in Switzerlandare 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 of theproject for Sandrine?