Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,450,000 and is expected to produce cash flows of €4,050,000 in Year 1, €5,050,000 in Year 2, and €5,450,000 in Year 3. The current spot exchange rate is $.74/€ and the current risk-free rate in the United States is 2.9 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 9 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 €9,950,000. 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 of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. $ 3,570,391.95 NPV

Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,450,000 and is expected to produce cash flows of €4,050,000 in Year 1, €5,050,000 in Year 2, and €5,450,000 in Year 3. The current spot exchange rate is $.74/€ and the current risk-free rate in the United States is 2.9 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 9 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 €9,950,000. 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 of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. $ 3,570,391.95 NPV

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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(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.
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"
9
Consider this case: Sebrele Enterprises Inc. is a U.S. firm evaluating a project in Australia. You have the following information about the project: The project requires an investment of AU$915,000 today and is expected to generate cash flows of AU$900,000 at the end of each of the next two years. The current exchange rate of the U.S. dollar against the Australian dollar is $0.7823 per Australian dollar (AUS). The one-year forward exchange rate is $0.8102 / AU$, and the two-year forward exchange rate is $0.8412 / AU$. The firm's weighted average cost of capital (WACC) is 9.5%, and the project is of average risk. What is the dollar-denominated net present value (NPV) of this project? $610,602 $726,908 $581,526 $639,679
Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2 million in Year 1, €2.4 million in Year 2, and €3.5 million in Year 3. The current spot exchange rate is 1.35€/$ 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 I
A US firm anticipates receiving 10 million Swedish Krona (SEK) in one year from a new contract that they just signed. They plan to pay this out as a dividend once they receive it. They also plan to use a forward contract to lock in an exchange of the SEK to US dollars. The current savings rate in the US is 1%/year and the rate to save in SEK is 2.8%/year. The current exchange rate is 0.1475 USD per SEK. What is the present value of 10 million SEK to be received at time t = 1 in SEK? (b) What is the present value of 10 million SEK to be received at time t = 1 in US dollars? (c) What is the future value, at t = 1, of 10 million SEK to be received at time t = 1 in US dollars?
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 $5,936,791
Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up. Year 0 + -€64,000 Year 1 Year 2 €160,000 -€100,000 The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. Find the euro-zone cost of capital. Write it down in percent with two decimals places.
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?
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?
Bhupatbhai
Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows: The U.S. one-year interest rate: 6.10% per annum; The euro zone one-year interest rate: 9.00% per annum; The spot exchange rate: $1.50/€; and The one-year forward exchange rate: $1.46/€. Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in exchange for a predetermined amount of U.S.dollars. Which of the following is/are true? On the maturity date of the contract Boeing will (0) have to deliver €10 million to the bank (the counter party of the forward contract). (ii) take delivery of $14.6 million (iii) have a zero net euro exposure (iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this sale. Oi) and (iv) O (0) and (iv) O (i), (ii), and (iv) (0.0) and (iii)

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