Etihad Amalgamated, a U.S. manufacturing firm, is considering a new project in P

Question

Etihad Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etihad's corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are shown here: You know that the spot exchange rate is S= $1.1531/epsilon. In addition, the risk-free interest rate on dollars is 4.1% and the risk-free interest rate on euros is 6.2%. Assume that these markets are internationally integrated and the uncertainty in the FCFs is not correlated with uncertainty in the exchange rate. You determine that the dollar WACC for these cash flows is 9.4%. What is the dollar present value of the project? Should Etihad Amalgamated undertake the project?

Explanation / Answer

Year 0 1 2 3 4 Cash out flow (In $)           (31.1) Cash inflow (In $) 9.8 13.7 15.1             16.7 Net              (31)               9.8             13.7             15.1             16.7 Discount value @ 9.4%           1.000           0.914           0.836           0.764           0.698 Present value (In $)           (31.1)               9.0             11.5             11.5             11.7 Net present value (In $)             12.5 Yes project shoul be undertaken, since it has positive net present value

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