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

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 Year Free Cash Flow (E million) 15.4 8.8 10.1 11.2 11.6 You know that the spot exchan e rate is S0.92 /E In addition, the nsk-free interest rate on dollars s 3.6% and the risk-free interest rate on euros 6.2%. Assume at these markets are tema na y Integrated and he uncertainty In he ree cash ky s is not correlated with uncertainty in the exchange ate. You determine that the dollar ACC or these cash flow s is 8.8%. What is the dollar present value of the pro ect? Should Etemadi Amal mated undertake the pro ect? Enter all outflows of cash as negative numbers.) s s E. (Round to five decimal places.) The forward rate for period 1 s The fonward rate for period 2 s s E. (Round to five decimal places.) The forward rate for period 3is The forward rate for period 4 is (Round to five decimal places.) The cash flow in dollars for period 0 is $million. (Round to three decimal places.) The cash flow in dolars for period 1 is S million. (Round to three doormal places.) The cash flow in dollars for period 2 is S million. (Round to three dedimal places.) The cash flow in dolars for period 3 is Smillion (Round to three decimal places) The cash flow in doillars for perod 4 is Smillion. (Round to three decimal places.) The net present value is million. (Round to three decimal places.) Based on the NPV, Etemadi Amalgamated S e. (Round to five decimal places.) undertake the project. (Select from the drop-down menu.) Enter your answer in each of the answer boxes.

Explanation / Answer

Forward Rate = Spot Rate x (1 + US rate) / (1 + Euro rate)

For year 1, Forward Rate = 0.92 x (1 + 3.6%) / (1 + 6.2%) = 0.89748

For year 2, Forward Rate = 0.89748 x (1 + 3.6%) / (1 + 6.2%) = 0.87550 and so on...

Cash Flows in dollar = Cash Flows in euros x Exchange rate

NPV can be calculated using NPV function on a calculator

CF0 = -14.168, CF1 = 7.898... CF4 = 9.665, I/Y = 8.8%

=> Compute NPV = $14.885

As NPV > 0, the firm should undertake the project.

Year CF (euro) Rate ($/€) CF ($) 0 -15.4 0.92000 -14.168 1 8.8 0.89748 7.898 2 10.1 0.87550 8.843 3 11.2 0.85407 9.566 4 11.6 0.83316 9.665 NPV $14.885

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