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Project Information for firm ABC: * Will export product to Mexico and is looking for firm to swap pesos with over life of project *

Project Information for firm ABC:

* Will export product to Mexico and is looking for firm to swap pesos with over life of project

* Time period of project is 4 years

* After tax cash flow expected to be 1,000,000 pesos

* Peso’s spot rate is $0.20

* Risk free annual interest rates: U.S. 6 percent, Mexico 11 percent

* Interest rate parity exists

* Use one year forward rate as predictor of exchange rate in one year

* Exchange rates will change by percentage predicted for year one in years 2 through 4

* Firm XYZ will take the 1,000,000 pesos each year at an exchange rate of $0.17 per peso

* Ignore taxes

ABCs details:

Capital Structure:
60 percent debt and forty percent equity
Corp. Tax rate:
30 percent
Debt financing cost:
10 percent
US expected stock returns:
18 percent
Beta:
0.9

ABC will use its cost of capital as required return on project

Determine the NPV if ABC enters into a swap agreement with XYZ and does not hedge its position.

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