PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 27, Problem 21PS
a)
Summary Introduction
To determine:
b)
Summary Introduction
To determine: Dollar cash flow and NPV
c)
Summary Introduction
To determine: The effects of the value of project if the company expects euro to
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Prblm
Question:
You have an investment opportunity in
the United Kingdom that requires
investment of $500,000 today and will
produce a cash flow of 320,000 euros
and one year with no risk. Suppose the
risk free rate of interest in the UK is 6%
and the current competitive exchange
rate is one point 70 per euro. What is the
NPV of this project? Would you take the
project?
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?
Chapter 27 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PSCh. 27 - Prob. 4PSCh. 27 - Prob. 5PSCh. 27 - Prob. 6PSCh. 27 - Prob. 8PSCh. 27 - Prob. 9PSCh. 27 - Prob. 10PSCh. 27 - Currency risk Companies may be affected by changes...
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