Country Risk and Project NPV Atro Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. Although it realizes that its receivables are uncertain, it decides to hedge receivables of 10 million euros with a for ward contract today. As of today, the spot rate of the euro is $1.20, the one-year forward rate of the euro is $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay of this project is $7 million. Atro has a required return of 18 percent. Estimate the NPV of this project based on the expectation of 10 million euros in receivables. Now estimate the NPV based on the possibility that country risk could cause a reduction in foreign business such that Atro receives only 4 million euros instead of 10 million euros at the end of one year. Estimate the NPV of the project if this form of country risk occurs.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 16, Problem 28QA
Textbook Problem

Country Risk and Project NPV Atro Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. Although it realizes that its receivables are uncertain, it decides to hedge receivables of 10 million euros with a for ward contract today. As of today, the spot rate of the euro is $1.20, the one-year forward rate of the euro is $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay of this project is $7 million. Atro has a required return of 18 percent.

  1. Estimate the NPV of this project based on the expectation of 10 million euros in receivables.
  2. Now estimate the NPV based on the possibility that country risk could cause a reduction in foreign business such that Atro receives only 4 million euros instead of 10 million euros at the end of one year. Estimate the NPV of the project if this form of country risk occurs.

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