Question

International Machinery Company (IMC) is a Swedish multinational manufacturing company. Currently, IMC'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 $2,650 and a cash inflow the following year of $3,350. IMC estimates that its risk-adjusted cost of capital is 14%. Currently, 1 U.S. dollar will buy 7.1 Swedish kronas. In addition, 1-year risk-free securities in the United States are yielding 6%, while similar securities in Sweden are yielding 5%.

a. If the interest parity holds, what is the forward exchange rate of Swedish krona per U.S. dollar? Do not round intermediate calculations. Round your answer to two decimal places.

Swedish krona per U.S. dollar

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

NPV:  Swedish kronas

Rate of return:  %

Answer 1

a) First let's calculate the forward rate

b. Let us first calculate the internal rate of return for the project. For that we need to convert each transaction into krona. We will use excel to calculate the internal rate of return.

The investments have negative sign as they are cash outflow. IRR=25.17%

For NPV, we can calculate NPV in dollars and then covert into kronas

NPV= Present Value of future cash flow - Initial investment

=$288.60 = multiply it by spot rate (7.1) to get the answer in krona=2049.04 Krona = NPV in local currency

Kindly let me know if you have any doubt.
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