UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 31, Problem 14QP
Capital Budgeting Lakonishok Equipment has an investment opportunity in Europe. The project coots €19 million and is expected to produce cash flows of €3.6 million in Year 1,€4.1 million in Year 2, and €5.1 million in Year 3. The current spot exchange rate is $1.04/€ and the current risk-free rate in the United States is 3.1 percent, compared to that in Europe of 2.9 percent. The appropriate discount rate for the project is estimated to be 10.5 percent, the U.S. cost of capital for the company. In addition, the subsidiary can he sold at the end of three years for an estimated €12.7 million. What is the
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B
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
NPV
Lakonishok Equipment has an investment opportunity in Europe. The project costs €18,406,730 and is expected to produce cash flows of €3,681,369 in Year 1, €4,992,682 in Year 2, and €6,337,782 in Year 3. The current spot exchange rate is $1.23/€ and the current risk-free rate in the United States is 3.71%, compared to that in Europe of 3.03%. The appropriate discount rate for the project is estimated to be 10.55%, 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 €12,529,609. What is the NPV of the project?
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14
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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)
Chapter 31 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 31 - Spot and Forward Rates Suppose the exchange rate...Ch. 31 - Prob. 2CQCh. 31 - Prob. 3CQCh. 31 - Prob. 4CQCh. 31 - International Risks At one point, Duracell...Ch. 31 - Multinational Corporations Given that many...Ch. 31 - Prob. 7CQCh. 31 - Exchange Rate Movements Some countries encourage...Ch. 31 - Prob. 9CQCh. 31 - Exchange Rate Risk If you are an exporter who must...
Ch. 31 - International Capital Budgeting Suppose it is your...Ch. 31 - International Capital Budgeting An investment in a...Ch. 31 - International Borrowing If a U.S. firm raises...Ch. 31 - International Investment If financial markets arc...Ch. 31 - Using Exchange Rates Take a look back at Figure 3...Ch. 31 - Prob. 2QPCh. 31 - Prob. 3QPCh. 31 - Using Spot and Forward Exchange Rates Suppose the...Ch. 31 - Prob. 5QPCh. 31 - Prob. 6QPCh. 31 - Interest Rates and Arbitrage The treasurer of a...Ch. 31 - Inflation and Exchange Rates Suppose the current...Ch. 31 - Exchange Rate Risk Suppose your company imports...Ch. 31 - Prob. 10QPCh. 31 - The International Fisher Effect You observe that...Ch. 31 - Prob. 12QPCh. 31 - Prob. 13QPCh. 31 - Capital Budgeting Lakonishok Equipment has an...Ch. 31 - Capital Budgeting You are evaluating a proposed...Ch. 31 - Prob. 16QPCh. 31 - Prob. 17QPCh. 31 - Using the Exact International Fisher Effect From...Ch. 31 - Prob. 1MCCh. 31 - What will happen to the companys profits if the...Ch. 31 - Ignoring taxes, what are East Coast Yachts...Ch. 31 - How can the company hedge its exchange rate risk?...Ch. 31 - Taking all factors into account, should the...
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