Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaires financial planners are considering undertaking a 1-year

Question:

Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar- denominated cash flows consist of an initial investment of $1,000 and a cash inflow the following year of $1,200. Solitaire estimates that its risk-adjusted cost of capital is 14%. Currently, 1 U.S. dollar will buy 1.025 Swiss francs. In addition, 1-year risk-free securities in the United States are yielding 7.25%, while similar securities in Switzerland are yielding 4.5%.

a. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?

b. What is the expected forward exchange rate 1 year from now?

c. If Solitaire undertakes the project, what is the net present value and rate of return of the project for Solitaire?

Net Present Value
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Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... 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...