What is the expected forward exchange rate 1 year from now?
For this Assignment, complete Problem 19-17, Parts a, b, and c on page 697 of your course text. This case examines the effects of exchange rates on net present values and rates of return.
In addition to solving for the rates of return from the U.S. and Swiss points of view, write a paragraph that summarizes your key learning points from this case. Be sure to include your calculations as an appendix.
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General Guidance on Application Length:
Will typically be 2–3 pages in length. Excel and Word document required.
Problem19-17
FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar-denominated cash flows consist of an initial investment of $2,000 and a cash inflow the following year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy 0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 3%, while similar securities in Switzerland are yielding 1.50%.
a. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated 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 the project for Sandrine?
FYI-Reading Resource
Brigham, E. F. , & Houston, J. F. (2019). Fundamentals of financial management (15th ed.). Boston, MA: Cengage Learning.
Chapter 19, “Multinational Financial Management” (pp. 664-699)
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