Question

Excel online activity: Foreign capital budgeting

Sandrine Machinery 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 flow consists of an initial investment of $2000 and a cash inflow the following year of $2400. Sandrine estimates that its risk-adjusted cost capital is 11%. currently, 1 U.S. dollar will buy 0.82 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 7.25% while similar securities in Switzerland are yielding 4.5%.

a. If this project was instead undertaken by a similar U.S.- based company with the same risk-adjusted cost of capital, what would the net present value and rate of return generated by the project?

NVP=$

Rate of Return=%

b. What is the expected forward exchange rate 1 year from now?

SF per U.S.$

c. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine?

NVP= Swiss Francs

Rate of return=%

Answer 1

Answer A)

Answer B)As interest rate in two currencies are different to each other , so forward exchange rate can be calculated by use of interest rate parity :

Spot rate (S) => 0.82 Swiss = 1 US$

R_US = 7.25% and R _Swiss = 4.5%

Forward Rate ( F) = S * [ 1 + (R _Swiss - R_US )]

F = 0.7975 CHF / US$

Answer C)