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: Free Cash Flow Year (EUR million) -15 10 12 12 You know that the spot exchange rate is S = USD 1.15 EUR. In addition, the risk-free interest rate on dollars is 4% and the risk-free interest rate on euros is 690 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? 14 15 16 17 18 19 20 Spot rate (USD/EUR) Risk-free rate on USD Risk-free rate on EUR WACC 1.15 4.00% 6.00% 8.50% F44 Expected Spot rate 21 Free Cash Flow Free Cash Flow Year (million EUR) (USD/EUR) (million USD) 15.00 9.00 10.00 11.00 12.00 1.1500 25 27 Project value (million USD) Undertake project? 30 31 32 33 Requirements 35 36 37 38 First, calculate the expected spot rate for the next few years by using the formula: F n S (1 + r USD) n/1 r_EUR) n. (2 points) In cell E24, calculate the expected spot rate for year 1 by using cell reference. Copy and paste cell E24 onto cells E25:E27 In cell F23, calculate the free cash flow in USD for year 0 by using cell reference. Copy and paste cell F23 onto cells F24:F27. (2 points) To calculate the project value, you will use the function NPV in cell E29. (1 point) To decide on the attractiveness of the project, you need to assess the value of the project by using the function IF In cell E30, show Yes if the firm should undertake the project; otherwise, show No. Hint: As the logical_test, compare whether the project value, cell E29, is larger than 0. (1 point) 39