Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question
The firm purchases a ship to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a ship operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver.
The firm is contemplating the following:
Acquisition cost € 1,000,000
Years of useful life (economic life) 5
Tax rate 0%
Required rate of
Annual revenues € 2,000,000
Operating expenses include only: “Other expenses” of € 1,500,000, plus depreciation.
The current exchange rates for USD/EUR:
|
Time |
0 |
1 |
2 |
3 |
4 |
5 |
|
USD per EUR |
$1.10/ €1 |
$1.13/ € |
$1.15/€ 1 |
$1.17/€1 |
$1.19/€1 |
$1.22/€1 |
|
Terminology |
“Spot” price for the Euro, “today” (from Bloomberg) |
Forward/Futures prices (from futures curve at Chicago Mercantile Exchange) Note: these are also expected spot prices at these dates in the future, via Rational Expectations. |
Tips:
1.
2. The maximum dividend is paid annually. Euros are exchanged for dollars to repatriate the cashflows to payout as dividends.
3. Ignore any working capital effects.
Question:
- CASHFLOW ANALYSIS: convert Euros to U.S. dollars
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