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FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar-denominated cash flows consist of an initial investment of 52,000 and a cash inflow the following year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy 0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 3%, while similar securities in Switzerland are yielding 1.50%. a. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated 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 the project for Sandrine?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter 19, Problem 17P
Textbook Problem

FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar-denominated cash flows consist of an initial investment of 52,000 and a cash inflow the following year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy 0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 3%, while similar securities in Switzerland are yielding 1.50%.

  1. a. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?
  2. b. What is the expected forward exchange rate 1 year from now?
  3. c. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine?

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Chapter 19 Solutions

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