Question
In: Finance
Etemadi Amalgamated, a U.S. manufacturing firm, is considered a new project in the euro area. You...
Etemadi Amalgamated, a U.S. manufacturing firm, is considered a new project in the euro area. You are in Etemadi's corporate finance dept, and are responsible for deciding whether to undertake the project. The free cash flows in euros are forecast to be the following.
Year Free cash flow
0 -15
1 9
2 10
3 11
4 12
You know that the spot exchange rate is $1,1500/E. In addition, the risk-free interest rate on dollars is 4.0% and the risk-free interest rate o forward ran Euros is 6.0% (and the yield curve is flat in both currencies). First, calculate the forward rates.
This question has 13 questions associated with it. If you solve this problem,, please do it by hand no excel formulas. I am a visual learner and need to learn it step by step and struggle with Excel. Please, and thank you
Missing information: Assume that these markets are internationally integrated and the uncertainty in the FCF is not correlated with uncertainty in the exchange rate. You determine that by the dollar WACC for these cost flows is 8.5%. What is the dollar present value of the project? Should Etemadi Amalgamated undertake this project? make sure to round all intermediate calculations to 4 decimal places. Thank You
Solutions
Expert Solution
| 0 | 1 | 2 | 3 | 4 | |
| Free cash flow | € -15.00 | € 9.00 | € 10.00 | € 11.00 | € 12.00 |
| Exchange rate ($/E) | 1.1500 | 1.1283 | 1.1070 | 1.0861 | 1.0656 |
| FCF in $ | € -17.25 | € 10.15 | € 11.07 | € 11.95 | € 12.79 |
| PVIF at 8.5% | 1 | 0.92166 | 0.84946 | 0.78291 | 0.72157 |
| PV at 8.5% | € -17.25 | € 9.36 | € 9.40 | € 9.35 | € 9.23 |
| NPV | € 20.09 |
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and $4.2 million in each of years 2 – 5. The cost of materials and
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