You work for a U.S.-based firm that is considering a project in which it will sell the use of its technology to firms in Brazil. Your firm already has received orders that will generate 5 million Brazilian reals (BRL) in revenue at the end of next year. However, it might also receive a contract to provide this technology to the Brazilian government. In this case, it will generate a total of BRL8,000,000 at the end of next year. It will not know whether it will receive the government order for a few months. Todays BRL spot rate is $0.18. The one-year forward rate is $0.16. Your firms only initial outlay is $650,000 to cover development expenses and your firms required rate of return for this project is 20% (both are regardless of whether the Brazilian government purchases the technology). Assume that your firm decides to hedge the maximum amount of revenue that it will receive from the project.

1. Determine the NPV if your firm receives the government contract.
2. If your firm does not receive the contract, it will have hedged more than it needed to and will offset the excess forward sales by purchasing BRL in the spot market at the time the forward contract is due. If your firm expects that the BRL spot rate will be $0.17 one year from now, determine the NPV of the project assuming that your firm does not receive the government contract.
3. Now consider an alternative strategy in which your firm only hedges the minimum BRL revenue that it will receive. In this case, any revenue due to the government contract will not be hedged. Determine the NPV based on this alternative strategy and assume that your firm does not receive the government contract (and that your firm expects the BRL spot rate to be $0.17 one year from now).