Project Information for firm ABC:

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

Time periodof project is4years

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

Peso's spot rate is $0.20

Risk freeannual interest rates:U.S. 6 percent, Mexico 11 percent

Interest rate parity exists

Use one yearone yearforward rate as predictor of exchange rate in one year

Exchange rates will change bysamepercentage 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