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

Question

Etemadi Amalgamated a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etemadi'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 $0.83 / In addition, the risk-free interest rate on dollars is 3.6% and the risk-free interest rate on euros is 5.9%. Assume that these markets are internationally integrated and the uncertainty in the free cash flows is not correlated with uncertainty in the exchange rate. You determine that the dollar WACC for these cash flows is 8.1%. What is the dollar present value of the project? Should Etemadi .Amalgamated undertake the project? (Enter all outflows of cash as negative numbers.) The forward rate for period 1 is (Round to five decimal places.)

Explanation / Answer

Step-1: First we calculated the forward rate of $/Euro from the formula,

Forward rate= Spot Rate*(1+Price Currency)/(1+Base Currency)

Where , Euro is Base Currency and $ is price currency because less of less than one.

Step-2:Converted the free Cash flow of Euro in $ through forward rate

Step-3: Calculate the discount factor of $ using WACC of 8.1%

Step-4: Calculated the present Value of Cash flow of $

Step-5: Calculated the Net Present Value of Project in $

Amount in Millions Year 0 1 2 3 4 Net Present Value Free Cash Floe (Euro) -14.5 8.6 10.3 11.2 11.5 Free Cash Flow ($) -12.035 6.966 8.137 8.736 8.74 Discount Factor @ 8.1% 1 0.925 0.856 0.792 0.732 Present Value of Cash Flow ($) -12.035 6.44355 6.965272 6.918912 6.39768 14.69041

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