Exchange Rate Effects on NPV
The German multinational manufacturing firm, Siemens Industries, is
debating whether to invest in a 2 year project in the United States.
The project's expected dollar cash flow consists of an initial investment
of $2M with cash inflows of $1.4M in year 1 and $1.2 M in year 2.
The risk adjusted cost of capital for this project is 15%.
The current exchange rate is 1.10 Euros per USD.
Risk free rates in the US and the Eurozone are:
Year	1	2
US	4%	4.25%
EuroZone	3%	3.25%
a. If the project were undertaken by a US based company (with no exchange rate issues),
what would be the NPV of the project?
b. What is the expected forward exchange rate 1 year from now and 2 years from now?
Please do this from the German perspective.
c. If Siemens undertakes the project, what is the NPV of the project (from the German perspective)?