International Capital Budgeting - Exercise Question 1 Damai Berhad is considering investing in a project in Iceland with an initial cost of €200,000. The project is expected to generate return of €75,000 the first year, €95,000 the second year and €180,000 the third and final year. The current spot rate is €0.4086 per USD1. The nominal risk-free return is 5.5% in Europe and 6% in the US. The return relevant to the project is 12% in the US. Assume that uncovered interest parity exists. From the above information you are required to: a. Calculate the Net Present Value of the project in US dollar using home currency approach. b. Should Damai Berhad proceed with the project? Justify. Solution: - a. Initial cost €200,000 = Year Return 1 €75,000 2 €95,000 3 €180,000 4 €180,000
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- OpenDoor Cafe is considering opening a new food court in a major US city. The initial investment is expected to be $11,550,000. The projected cash flows are $3,410,000 in years one and two, $2,220,000 in year three, $1,990,000 in year four, and $4,485,000 on year five. What is this project's internal rate of return? 18.03% 10.61% 12.70% 6.95%How Country Risk Affects NPV Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinars in each year. After two years, Monk will terminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of12 percent to this project. The following additional information is available: There is currently no withholding tax on remittances to the United States, but there is a 20 percent chance that the Tunisian government will impose a withholding tax of 10 percent beginning next year. There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after two years instead of the 300,000 dinars it expects. The value of the dinar is expected to remain unchanged over the next two years. a. Determine the net present value of the project in…FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinationalmanufacturing company. Currently, Sandrine’s financial planners are consideringundertaking a 1-year project in the United States. The project’s expected dollardenominated cash flows consist of an initial investment of $2,000 and a cash inflow thefollowing year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%.Currently, 1 U.S. dollar will buy 0.94 Swiss franc. In addition, 1-year risk-freesecurities in the United States are yielding 3%, while similar securities in Switzerlandare yielding 1.50%.a. If this project was instead undertaken by a similar U.S.-based company with the samerisk-adjusted cost of capital, what would be the net present value and rate of returngenerated 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 theproject for Sandrine?
- The US based company is investing in a 2-year project in Europe. The initial investment is €10,000. The expected cash inflow in the year one is €6,000 and in the year two is €8,000. The risk-free rate in US is 3% and Europe 2%. If the spot rate is $1.25/€ and the required rate of return of the project is 14%, calculate the NPV of the project in dollars. (A) The NPV of the project in dollars is $1,773.62. (B) The NPV of the project in dollars is $1,704.32. (C) The NPV of the project in dollars is $1,418.90. (D) The NPV of the project in dollars is $1,989.74.Task 5A Sweden-based fund is considering investing in 1-year savings in the US that give a return of 10%. The spot exchange rate SEK / USD is currently 10 SEK / USD but is expected to be 9 SEK / USD in a year. The investment amount the fund intends to invest in the USA is SEK 100 million. A) Calculate the expected return for the 1-year savings in SEK. B) Assume that the spot exchange rate at the future date will not be SEK 9 / USD but instead SEK 9.50 / USD . What will be the return in SEK from the 1-year savings?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.
- How Country Risk Affects NPVMonk, Inc., isconsidering a capital budgeting project in Tunisia. Theproject requires an initial outlay of 1 million Tunisiandinars; the dinar is currently valued at $.70. In the firstand second years of operation, the project will generate 700,000 dinars in each year. After two years, Monk willterminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of12 percent to this project. The following additionalinformation is available: There is currently no withholding tax on remit-tances to the United States, but there is a 20 percentchance that the Tunisian government will impose awithholding tax of 10 percent beginning next year. There is a 50 percent chance that the Tunisian gov-ernment will pay Monk 100,000 dinar after twoyears instead of the 300,000 dinars it expects. The value of the dinar is expected to remainunchanged over the next two years. a.Determine the net present value of the project ineach of the…A company is considering an investment project in Canada which has an initial cost of CAD5,785,000. The project is expected to return a one-time payment of CAD7,430,000 two years from now. The risk-free rate of return is 1.6 percent in the U.S. and 1.9 percent in Canada. The inflation rate is 1.5 percent in the U.S. and 1.8 percent in Canada. Currently, you can buy CAD 124.20 for $100. How much will the payment two years from now be worth in U.S. dollars? $5,917,265 $5,956,317 $5,927,028 $5,946,554 $5,936,791A 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 project
- BaghibenUse the following information to calculate the NPV for an overseas expansion: Year Cash Flow -$20,000 1 18,000 2 12,000 8,000 What is the NPV at a required return of 7%? Should the firm accept the project? What if the required return is 14%? 3.A. You want to invest in a riskless project in Sweden. The project has aninitial cost of SKr2.1 million and is expected to produce cash inflowsof SKr810,000 a year for 3 years. The project will be worthless afterthe first 3 years. The expected inflation rate in Sweden is 2 percentwhile it is 5 percent in the U.S. A risk-free security is paying 6percent in the U.S. The current spot rate is $1 = SKr7.55. What is thenet present value of this project in Swedish krona using the foreigncurrency approach? Assume that the international Fisher effect applies. B. In a recent e-news, you observe that the 6-month forward rate is $1.5031/ Euro. Further, if you invest the dollar, it fetches you interest atthe rate of 2% p.a. In comparison, the interest rate in Eurozone is 1%p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD1.332 are needed to buy a US$. Is it possible for you to make an arbitrageprofit? If so, which of the arbitrage strategies will you employ andwhat will be…