PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 27, Problem 21PS
a)
Summary Introduction
To determine:
b)
Summary Introduction
To determine: Dollar cash flow and NPV
c)
Summary Introduction
To determine: The effects of the value of project if the company expects euro to
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Sub : FinancePls answer very fast.I ll upvote CORRECT ANSWER . Thank You
A French company is considering a project in US. The project will cost $100M. The cash flows are expected to be $30M per year for 5 years. The current spot exchange rate is $1.20/ . The risk-free rate in the US is 1%, and the risk-free rate in Europe is 2%. The dollar required return on the project is 12%. Find the NPV in home currency using home currency approach.
Please note correct answer is $7.1 million. please show detailed workings.
It is the year 2021 and Pork Barrels, Inc., is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions of euros are as follows:
C0
C1
C2
C3
C4
C5
–95
+25
+35
+38
+42
+40
The spot exchange rate is $1.35 = €1. The interest rate in the United States is 8%, and the euro interest rate is 6%. You can assume that pork barrel production is effectively risk-free.
a-1. Calculate the NPV of the euro cash flows from the project.
a-2. What is the NPV in dollars?
b. What are the dollar cash flows from the project if the company hedges against exchange rate changes?
Suppose that you are the CFO of Google with an extra U.S. $20 Million to invest for one year. You are considering the purchase of U.S. T-bills that yield 4% per year. The spot exchange rate is $1.00 = €0.90, and the one-year forward rate is $1.00 = €0.95 . What must the interest rate in the Eurozone (on an investment of comparable risk) be before you are willing to consider investing there instead of the US?
a.
9.78%
b.
1.56%
c.
4.00%
d.
5.56%
Chapter 27 Solutions
PRINCIPLES OF CORPORATE FINANCE
Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PSCh. 27 - Prob. 4PSCh. 27 - Prob. 5PSCh. 27 - Prob. 6PSCh. 27 - Prob. 8PSCh. 27 - Prob. 9PSCh. 27 - Prob. 10PSCh. 27 - Currency risk Companies may be affected by changes...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You have an investment opportunity in Japan. It requires an investment of $1.06 million today and will produce a cash flow of ¥109 million in one year with no risk. Suppose the risk-free interest rate in the United States is 3.8%, the risk-free interest rate in Japan is 2.5%, and the current competitive exchange rate is ¥110 per dollar. What is the NPV of this investment? Is it a good opportunity? What is the NPV of this investment? The NPV of this investment is S. (Round to the nearest dollar)arrow_forwardWithout Using Excel: ABC Company wants to possibly expand its plant in Europe. The current spot exchange rate is for Euro is €0.83. The initial investment is €2.1, with projected cash flows for three years at €950,000. The discount rate is 10%. The risk-free rate in the US is 5 percent and the risk-free rate in Europe is 7 percent. Calculate the NPV of the project into US Dollars, rounding to the nearest cent, format as "XXX,XXX.XX"arrow_forward"A French company is considering a project in US. The project will cost $100M. The cash flows are expected to be $30M per year for 5 years. The current spot exchange rate is $1.20/. The risk - free rate in the US is 1%, and the risk - free rate in Europe is 2%. The dollar required return on the project is 12%. Find the NPV in foreign currency using foreign currency approach. The answers below are in millions." -37.281 161.634 8.143 1.631 82.136arrow_forward
- You are analyzing a very low-risk project with an initial cost of €120000. The project is expected to return €40000 the first year, €50000 the second year and €60000 the third year. The current spot rate is €.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. using the home currency approach, what is the net present value of this project in U.S dollars?arrow_forwardA French company is considering a project in US. The project will cost $100M. The cash flows are expected to be $30M per year for 5 years. The current spot exchange rate is $1.20/ . The risk-free rate in the US is 1%, and the risk-free rate in Europe is 2%. The dollar required return on the project is 12%. Find the NPV in home currency using home currency approach. Correct answer is $7.1 million Please answer urgently will upvotearrow_forwardB Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,250,000 and is expected to produce cash flows of €3,850,000 in Year 1, €4,850,000 in Year 2, and €5,250,000 in Year 3. The current spot exchange rate is $.78/€ and the current risk-free rate in the United States is 2.6 percent, compared to that in euroland of 2.2 percent. The appropriate discount rate for the project is estimated to be 12 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9,750,000. What is the NPV of the project in U.S. dollars? (Do not found intermediate calculations and enter your answer in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. $ 525,486,652 40 NPVarrow_forward
- (C) US Bank is considering investing in a three years' project in Europe country. The project would require an initial investment of $750,000 and it is expected to generate €80,000, €100,000 and €150,000 in year one until three, respectively. The business risk will be identical to the firm's existing line of business in the euro-zone, the required rate of return in the euro-zone is 18 percent. The exchange rate is $1.20/€ where the dollar also shows appreciating by one percent for every year. Determine the Net Present Value (NPV) in dollar currency for this project and justify.arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €13 million and is expected to produce cash flows of €2.6 million in Year 1, €3.2 million in Year 2, and €3.7 million in Year 3. The current spot exchange rate is $1.41 / €; and the current risk- Lakonishok Equipment has an investment opportunity in Europe. The project costs €13 million and is expected to produce cash flows of €2.6 million in Year 1, €3.2 million in Year 2, and €3.7 million in Year 3. The current spot exchange rate is $1.41 / €; and the current risk-free rate in the United States is 2.7 percent, compared to that in Europe of 2 percent. The appropriate discount rate for the project is estimated to be 14 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €8.6 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? free rate in…arrow_forwardYour company is looking at a new project in Mexico. The project will cost 9 million pesos. The cash flows are expected to be 2.25 million pesos per year for 5 years. The current spot exchange rate is 9.08 pesos per Canadian dollar. The risk-free rate in the Canada is 4% and the risk-free rate in Mexico 8%. The dollar required return is 15%. Should the company make the investment?arrow_forward
- Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.4 million in Year 1, €3 million in Year 2, and €3.9 million in Year 3. The current spot exchange rate is $1.39/€; and the current risk-free rate in the United States is 2.0 percent, compared to that in Europe of 2.5 percent. The appropriate discount rate for the project is estimated to be 12 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9.4 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89)arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2 million in Year 1, €2.4 million in Year 2, and €3.5 million in Year 3. The current spot exchange rate is 1.35€/$ and the current risk-free rate in the United States is 2.8 percent, compared to that in Europe of 2 percent. The appropriate discount rate for the project is estimated to be 14 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) NPV Iarrow_forwardA Canadian firm is evaluating an investment in Indonesia. The project costs 580 billion Indonesian rupiah and it is expected to produce an income of 280 billion Indonesian ruplah a year in real terms for each of the next 3 years. The expected inflation rate in Indonesia is 11% per year and the firm estimates that an appropriate discount rate for the project would be about 5% above the risk-free rate of interest. Calculate the net present value of the project in dollars. Assume a spot exchange rate of $.000112/Rupiah. The interest rate is about 15% in Indonesia and 4% in Canada (Round your answer to 2 decimal places. Enter your answer in millions of Canadian dollers.) NPV of the projectarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License