Foreign Divestiture Decision Baltimore Co.

considers divesting its six foreign projects as of today.

Each project will last 1 year. Its required rate of return on each project is the same. The cost of operations for each project is denominated in dollars and is the same.

Baltimore believes that each project will generate the equivalent of $10 million in 1 year based on today’s exchange rate. However, each project generates its cash flow in a different currency. Baltimore believes that interest rate parity (IRP) exists. Baltimore forecasts exchange rates as explained in the table below.

a. Based on this information, which project will Baltimore be most likely to divest? Why?

b. Based on this information, which project will Baltimore be least likely to divest? Why?

PROJECT COMPARISON OF 1-YEAR U.S.
AND FOREIGN INTEREST RATES FORECAST METHOD USED TO FORECAST THE SPOT RATE 1 YEAR FROM NOW Country A U.S. interest rate is higher than currency A’s interest rate Spot rate Country B U.S interest rate is higher than currency B’s interest rate Forward rate Country C U.S. interest rate is the same as currency C’s interest rate Forward rate Country D U.S. interest rate is the same as currency D’s interest rate Spot rate Country E U.S. interest rate is lower than currency E’s interest rate Forward rate Country F U.S. interest rate is lower than currency F’s interest rate Spot rate