Question

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 $2000 and a cash inflow the following year of $2400. Sandrine estimates that its risk-adjusted cost of capital is 13%. Currently, 1 U.S. dollar will buy 0.73 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 6.75%, while similar securities in Switzerland are yielding 3%.

1. 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? Round your answers to two decimal places.

   NPV = $  

   Rate of return = %

2. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places.

   SF per U.S. $

3. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine? Do not round intermediate calculations. Round your answers to two decimal places.

   NPV = Swiss Francs

   Rate of return = %

Answer 1

Answer	a	Years	Cash Flow	Present Value Factor	Amount
		0	-20000	1.0000	-20,000.00
		1	24000	0.8850	21,238.94
		Net Present Value			1,238.94
		Rate of Return =		Net Present Value or Return
				Initial Cash Outflow
			=	1238.94/20000 X 100
			=	6.19%
Answer	b	Present Exchange Rate
		1US $	=	0.73 Francs
		Risk Free Rates
		US		=	6.75%
		Switzerland		=	3%
		Return In depositing for 1 year
		US		=	1+(1*6.75%)
				=	1.0675
		Switzerland		=	0.73+(0.73*3%)
					0.7519
		Forward Rate Swiss Francs Per US Dollar
				=	0.7519/1.0675
				=	0.7044
		1 US $		=	0.7044
Answer	c
		Years	Cash Flow $	Exchange Rate	Cash Flow	Present Value Factor	Amunt
		0	-20000	0.7300	-14,600.00	1.0000	-14,600.00
		1	24000	0.7519	18,045.60	0.8850	15,969.56
		Net Present Value					1,369.56
		Rate of Return =		Net Present Value or Return
				Initial Cash Outflow
			=	1369.56/14600X100
			=	9.38%