Carpet Baggers, Incorporated, is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows: Candidates Germany (millions of euros) Switzerland (millions of Swiss francs) Co -65 -102 C₁ +15 +25 C₂ C C +20 +20 +25 +35 +35 +40 Cs Co +25 +25 +40 +40 IRR (4) 21.9 24.3 The spot exchange rate for euros is EUR/USD 1.35, while the rate for Swiss francs is USD/CHF = 1.55. The interest rate is 6% in the United States, 5% in Switzerland, and 7% in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10% would be acceptable. a. Calculate the NPV in dollars for the German plant. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. Calculate the NPV in dollars for the Swiss plant.. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. Should the company go ahead with either project? d. If it must choose between them, which should it take?

Carpet Baggers, Incorporated, is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows: Candidates Germany (millions of euros) Switzerland (millions of Swiss francs) Co -65 -102 C₁ +15 +25 C₂ C C +20 +20 +25 +35 +35 +40 Cs Co +25 +25 +40 +40 IRR (4) 21.9 24.3 The spot exchange rate for euros is EUR/USD 1.35, while the rate for Swiss francs is USD/CHF = 1.55. The interest rate is 6% in the United States, 5% in Switzerland, and 7% in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10% would be acceptable. a. Calculate the NPV in dollars for the German plant. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. Calculate the NPV in dollars for the Swiss plant.. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. Should the company go ahead with either project? d. If it must choose between them, which should it take?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 22P

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Vijay

Carpet Baggers, Incorporated, is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are
Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows:
Candidates
Co
C₁
-65
+15
+25
Germany (millions of euros)
Switzerland (millions of Swiss francs) -102 +25 +35 +35 +40
C₂
+20
C3 C
+20
a. Net present value
b. Net present value
c. Should the company go ahead with either project?
d. If it must choose between them, which should it take?
Cs
+25
+40
million
million
Co
+25
+40
The spot exchange rate for euros is EUR/USD=1.35, while the rate for Swiss francs is USD/CHF = 1.55. The interest rate is 6% in the
United States, 5% in Switzerland, and 7% in the euro countries. The financial manager has suggested that, if the cash flows were stated
in dollars, a return in excess of 10% would be acceptable.
IRR (4)
21.9
24.3
a. Calculate the NPV in dollars for the German plant.
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
b. Calculate the NPV in dollars for the Swiss plant.
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
c. Should the company go ahead with either project?
d. If it must choose between them, which should it take?

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