Question
ABC Co., a U.S. company, has decided to undertake a 2-year project in Canada. The project is expected to generate 18,000,000 Canadian dollars (C$) in
ABC Co., a U.S. company, has decided to undertake a 2-year project in Canada. The project is expected to generate 18,000,000 Canadian dollars (C$) in the first year and C$40,000,000 in the second.ABC will need to invest $35,000,000 at the start of the project. ABC has decided to use a cost of capital of 14 percent, which it uses for similar projects. The spot rate of the Canadian dollar is expected to be $.79 for the first year and $.82 for the second year.
(1) What is the net present value of the project in U.S. dollars?
(2) Would a stable exchange rate of $.79 for both years be to the advantage or disadvantage of Marcus? Explain.
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