It is the year 2018 and Pork Barrels Inc. is considering construction of a new barrel plant
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It is the year 2018 and Pork Barrels Inc. is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions of euros are as follows:
C0 C1 C2 C3 C4 C5
80 10 20 23 27 25 The spot exchange rate is $1.2 €1. The interest rate in the United States is 8% and the euro interest rate is 6%. You can assume that pork barrel production is effectively riskfree.
a. Calculate the NPV of the euro cash flows from the project. What is the NPV in dollars?
b. What are the dollar cash flows from the project if the company hedges against exchange rate changes?
c. Suppose that the company expects the euro to depreciate by 5% a year. How does this affect the value of the project?
INTERMEDIATE AppendixLO1
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