Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Quantitative Problem: International Machinery Company (IMC) is a Swedish multinational manufacturing company. Currently, IMC's financial planners are considering undertakin a 1-year project in the United

image text in transcribed Quantitative Problem: International Machinery Company (IMC) is a Swedish multinational manufacturing company. Currently, IMC's financial planners are considering undertakin a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2,200 and a cash inflow the following year of $3,800 IMC estimates that its risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 6.5 Swedish kronas. In addition, 1-year risk-free securities in the United States are yielding 5\%, while similar securities in Sweden are yielding 4%. a. If the interest parity holds, what is the forward exchange rate of Swedish krona per U.S. dollar? Do not round intermediate calculations. Round your answer to two decimal places. Swedish krona per U.S. dollar Hide Feedback Incorrect Check My Work Feedback Realize that Sweden is the home country in this problem. Refer to the interest rate parity equation substituting values given to calculate the 1 -year forward rate. The spot rate in the problem is expressed in terms of the amount of home currency per unit of foreign currency. (Home currency = Swedish krona) Calculate the value on the right-hand side of the equation because both values are known. Now, you can calculate the forward exchange rate in terms of Swedish krona per U.S. dollar. b. If IMC undertakes the project, what is the net present value and rate of return of the project for IMC in home currency? Do not round intermediate calculations. Round your answers to two decimal places. NPV: Rate of return: Swedish kronas %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management For Public, Health, And Not-for-Profit Organizations

Authors: Steven A. FinklerDaniel L. Smith, Thad D. Calabrese

6th Edition

978-1506396811, 150639681X

More Books

Students also viewed these Finance questions