Question
It is the year 2021 and Pork Barrels, Inc., is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions
It is the year 2021 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 |
100 | +30 | +40 | +43 | +47 | +45 |
The spot exchange rate is $1.40 = 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 risk-free.
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a-1. Calculate the NPV of the euro cash flows from the project.
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a-2. What is the NPV in dollars?
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b. What are the dollar cash flows from the project if the company hedges against exchange rate changes?
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c. Suppose that the company expects the euro to depreciate by 5% a year, will this affect the value of the project?
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