Question

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Consider the following international investment opportunity: year 0 -50000 euro Year 1 15000 euro year 2...

Consider the following international investment opportunity:

year 0 -50000 euro Year 1 15000 euro year 2 15000 year 3 15000

The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro-zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent.

Find the dollar cash flows to compute the dollar-denominated NPV of this project.

Solutions

Expert Solution

Exchange Rate in Year 1 = Euro1 * (1 + EZ Rate) = $1.60 * (1 + US Rate)

Exchange Rate in Year 1 = 1 * (1 + 0.02) = $1.60 * (1 + 0.03)

Exchange Rate in Year 1 = 1 Euro = 1.6157

Exchange Rate in Year 2 = Euro1 * (1 + EZ Rate) = $1.60 * (1 + US Rate)

Exchange Rate in Year 2 = 1 * (1 + 0.02) = $1.6157 * (1 + 0.03)

Exchange Rate in Year 2 = 1 Euro = 1.6315

Exchange Rate in Year 3 = Euro1 * (1 + EZ Rate) = $1.60 * (1 + US Rate)

Exchange Rate in Year 3 = 1 * (1 + 0.02) = $1.6315 * (1 + 0.03)

Exchange Rate in Year 3 = 1 Euro = 1.6475

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jeff jeffy answered 2 years ago
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