Free Cash Flow million euros |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
-25 |
12 |
14 |
15 |
15 |
The project has similar dollar risk to the company’s other projects. The company knows that its overall dollar WACC is 9.5%, so it feels comfortable using this WACC for the project. The risk-free interest rate on dollars is 4.5% and the risk-free interest rate on euros is 7%. The company is willing to assume that the capital markets in the United States and the euro area are internationally integrated.
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Your company is considering an investment in the euro area. The expected cash flows in Euros...
Hedging Decision. Indiana Company expects to receive 5 million euros in one year from exports. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the following strategies: a) unhedged strategy b)money market hedge c)option hedge The spot rate of the euro as of today is $1.10. Interest rate parity exists. Indiana Company uses the forward rate as a predictor of the future...
2. Now relax the assumption that the expected free cash flows are uncorrelated with the spot exchange rate. Give an example where the cash flows of the foreign project are affected by exchange rate risk, and suggest an approach to address this issue when valuing the project. Add your own assumptions to the information above to provide a simple numerical illustration of capital budgeting with exchange rate risk.
Your company is looking at a new project in Mexico. The project will cost 900,000 pesos. The cash flows are expected to be 400,000 pesos per year for 5 years. The current spot exchange rate is 19.07 pesos per dollar. The risk-free rate in the US is 4%, and the risk-free rate in Mexico 8%. The dollar required return is 10%. What is the net present value of this investment in U.S. Dollars? PLEASE SHOW IN EXCEL
(Calculating operating cash flows) The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $3,400,000 per year. The project will also involve annual cash expenses (including both fixed and variable costs) of $1,200,000, while increasing depreciation by $360,000 per year. If the firm's tax rate is 37 percent, what is the project's estimated net operating profit after taxes? What is the project's annual operating cash flow? At a tax rate of 37%, the project's...
(Calculating operating cash flows) The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $2,800,000 per year. The project will also involve annual cash expenses (including both fixed and variable costs) of $800,000, while increasing depreciation by $410,000 per year. If the firm's tax rate is 35 percent, what is the project's estimated net operating profit after taxes? What is the project's annual operating cash flow? At a tax rate of 35%, the project's...
(Calculating operating cash flows) The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $3,300,000 per year. The project will also involve annual cash expenses (including both fixed and variable costs) of $1,100,000, while increasing depreciation by $440,000 per year. If the firm's tax rate is 31 percent, what is the project's estimated net operating profit after taxes? What is the project's annual operating cash flow? At a tax rate of 31%, the project's...
Victory MNC company plans to pursue a project in Italy that will generate revenue of 15 million Euro at the end of the next 3 years. It will have to pay operating expenses of 6 million Euro per year In addition, depreciation is expected to be 1 million Euro per year. The project can be sold for 60 million Euro at the end of its life (net of any capital gain taxes). The Italian government charges 25 percent tax rate...
Problem 2 (10 points) A specialist dermatology and cosmetic surgery chain is considering opening a clinic in Germany that requires an investment of $250,000 today and will produce a cash flow of 208,650 euros in one year with no risk. Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is 0.78 euros to 1 dollar. What is the NPV of this project? Would you advise them to take the project? (1) NPV =...
One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies Consider this case: LeBron Development Inc. is a U.S. firm evaluating a project in Australia. You have the folowing information about the project .The project requires an investment of AU$1,340,000 today and is expected to generate cash flows of AU$900,000 at the end of eacha of the next two years. The current exchange rate of the U.S. dollar against the Australian...
Your company is evaluating an investment opportunity that will require an initial cash outlay of $10,000. It is anticipated that the investment will generate $2,000 in added annual revenues for 10 years. The cost of capital for the project is 10%. Examples of cash flow considerations: (based on the project described above) For each of the project details provided below, indicate whether 1) It should be included in calculating the company’s NPV for the project, and 2 ) How the...