Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in the euro area. You are

Question:

Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in the euro area. 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 (€)

0................................... -15

1..................................... 9

2.................................... 10

3..................................... 11

4..................................... 12

You know that the spot exchange rate is S = $1.15/€. In addition, the risk-free interest rate on dollars is 4% and the risk-free interest rate on euros is 6%.

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 8.5%. What is the dollar present value of the project? Should Etemadi Amalgamated undertake the project?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...