Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 27, Problem 14P
a)
Summary Introduction
To determine: The
b)
Summary Introduction
To determine: The 1 year and 2 year expected forward exchange rate from now.
c)
Summary Introduction
To determine: The NPV and rate of return of the project for N.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The project's expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and
$600,000 in Year 2. The risk-adjusted cost of capital for this project is 12%. The current exchange rate is 1,055 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:
%
U.S.
S. Korea
a. If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value generated by this project? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
What would be the rate of return generated by this project? Do not round intermediate calculations. Round your answer to two decimal places.
1-Year
4.0%
3.0%
Rate of return:
2-Year
5.25%
4.25%
b. What is the expected forward exchange rate 1…
A project in Japan will generate 130M Yen per year forever. Sunrise Corp. is a US firm that is considering investing in that project in Japan. The current risk-free rate in US is 7% and the risk-free rate in Japan is 5%. The approproate cost of capital for a US-based project of similar risk is 15.8%. What is the cost of capital if you are using the foreign currency approach? 17.8% 8.8% 20.8%
A U.S. firm is considering purchasing a subsidiary in the UK. The subsidiary will cost 6M British pounds and will generate cash inflows of 1.2M pounds per year forever. The current exchange rate is 0.8 pounds/$. The average inflation rate is expected to be 2% in the US. The current risk-free rate of interest is 4% in the US and 9% in the UK. Assume the cost of capital for this project is 10% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach?
5%
13%
10%
15%
9%
Chapter 27 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 27 - Define each of the following terms: a....Ch. 27 - Prob. 2QCh. 27 - Prob. 3QCh. 27 - Prob. 4QCh. 27 - If the United States imports more goods from...Ch. 27 - Prob. 6QCh. 27 - Should firms require higher rates of return on...Ch. 27 - Prob. 8QCh. 27 - Prob. 9QCh. 27 - Prob. 10Q
Ch. 27 - Prob. 1PCh. 27 - The nominal yield on 6-month T-bills is 7%, while...Ch. 27 - Prob. 3PCh. 27 - If euros sell for 1.50 (U.S.) per euro, what...Ch. 27 - Suppose that the exchange rate is 0.60 dollars per...Ch. 27 - Prob. 6PCh. 27 - Prob. 7PCh. 27 - Prob. 8PCh. 27 - Prob. 9PCh. 27 - Prob. 10PCh. 27 - Boisjoly Watch Imports has agreed to purchase...Ch. 27 - Prob. 12PCh. 27 - Prob. 13PCh. 27 - Prob. 14PCh. 27 - Prob. 1MCCh. 27 - Prob. 2MCCh. 27 - Prob. 3MCCh. 27 - Prob. 4MCCh. 27 - Prob. 5MCCh. 27 - Prob. 6MCCh. 27 - Prob. 7MCCh. 27 - Prob. 8MCCh. 27 - Prob. 9MCCh. 27 - Prob. 10MCCh. 27 - Prob. 11MCCh. 27 - Prob. 13MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Copper International is a U.S. based company that would like to invest in a project in Europe. The initial cost of the project is €12 million. It is expected to generate a cash flow of €5.4 million each year in the next three years. The current spot exchange rate is €0.8/$. The current risk-free rates in the United States and Europe are 3 percent and 5 percent, respectively. The cost of capital for Copper on U.S. dollar investments is estimated to be 9 percent. (a) Calculate the projected exchange rate each year over the life of the project. Do you expect the U.S. dollar to appreciate or depreciate relative to the Euro during this period? (b) Calculate the NPV of the project using the home currency approach. (c) Assume that the international Fisher effect holds. Calculate the NPV of the project using the foreign currency approach. (d) You notice that the spot exchange rate for the Swiss franc is SF per $1 = 1.7, and the cross-rate is € per SF = 0.40. Do you think this is a fair rate?…arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2 million in Year 1, €2.4 million in Year 2, and €3.5 million in Year 3. The current spot exchange rate is 1.35€/$ 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_forwardConsider 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 $639,679arrow_forward
- Raghubhaiarrow_forwardA 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 $5,936,791arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €15,200,000 and is expected to produce cash flows of €3, 800,000 in Year 1, €4, 800,000 in Year 2, and €5, 200,000 in Year 3. The current spot exchange rate is $.83/€ and the current risk - free rate in the United States is 2.6 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 11 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, 700,000. 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.)arrow_forward
- A 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_forwardLakonishok 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?arrow_forwardInternational Foods Corporation, a U.S.-based food company, is considering expanding its soup-processing operations in Switzerland. The company plans a net investment of $7 million in the project. The current spot exchange rate is SF5.5 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF6 million for 12 years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 19 percent. Calculate the net present value of the proposed expansion project. Use Table IV to answer the questions below. Enter your answer in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answer to two decimal places.arrow_forward
- You want to invest in a riskless project in Australia. The project has an initial cost of AUD3.86 million and is expected to produce cash inflows of AUD 2 million a year for four years. The project will be worthless after four years. The expected inflation rate in Australia is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is AUD7.7274. What is the net present value of this project in Australian Dollar if the international Fisher effect applies?arrow_forwardManshukharrow_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
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Working capital explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=XvHAlui-Bno;License: Standard Youtube License