Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 31, Problem 4P
Summary Introduction
To determine: The present value of the project and whether ET should undertake the project.
Introduction: The present value is an amount that an individual makes as an investment at present in order to generate the cash flow in the future. The present value of the cash flows can be computed by adding the cash flow of every stream.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are analyzing a very low-risk project with an initial cost of €120000. The project is expected to return €40000 the first year, €50000 the second year and €60000 the third year. The current spot rate is €.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. using the home currency approach, what is the net present value of this project in U.S dollars?
Lakonishok Equipment has an investment opportunity in Europe. The project costs €12
million and is expected to produce cash flows of €2 million in Year 1, €2.4 million in Year
2, and €3.5 million in Year 3. The current spot exchange rate is 1.35€/$ and the current
risk-free rate in the United States is 2.8 percent, compared to that in Europe of 2
percent. The appropriate discount rate for the project is estimated to be 14 percent, the
U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of
three years for an estimated €9 million. Use the exact form of interest rate parity in
calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do
not round intermediate calculations and enter your answer in dollars, not in millions,
rounded to two decimal places, e.g., 1,234,567.89)
NPV
I
Lakonishok Equipment has an investment opportunity in Europe. The project costs €17491457 and is expected to produce cash flows of €3443382 in Year 1, €4719807 in Year 2, and €5267392 in Year 3. The current spot exchange rate is $1.20/€ and the current risk-free rate in the United States is 3.22%, compared to that in Europe of 2.98%. The appropriate discount rate for the project is estimated to be 11.10%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €12673677. What is the NPV of the project?
NOTE: Enter the number rounding to four DECIMALS.
Chapter 31 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 31.1 - Prob. 1CCCh. 31.1 - What implication do internationally integrated...Ch. 31.2 - Prob. 1CCCh. 31.2 - When do these two methods give the same NPV of the...Ch. 31.3 - Prob. 1CCCh. 31.3 - Prob. 2CCCh. 31.4 - Prob. 1CCCh. 31.4 - Prob. 2CCCh. 31.5 - What conditions cause the cash flows of a foreign...Ch. 31.5 - Prob. 2CC
Ch. 31 - You are a U.S. investor who is trying to calculate...Ch. 31 - Mia Caruso Enterprises, a U.S. manufacturer of...Ch. 31 - Etemadi Amalgamated, a U.S. manufacturing firm, is...Ch. 31 - Prob. 4PCh. 31 - You work for a U.S. firm, and your boss has asked...Ch. 31 - Prob. 6PCh. 31 - Prob. 7PCh. 31 - Prob. 8PCh. 31 - Prob. 9PCh. 31 - Prob. 10PCh. 31 - Prob. 11PCh. 31 - Prob. 12PCh. 31 - Assume that in the original Ityesi example in...
Knowledge Booster
Similar questions
- Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.4 million in Year 1, €3 million in Year 2, and €3.9 million in Year 3. The current spot exchange rate is $1.39/€; and the current risk-free rate in the United States is 2.0 percent, compared to that in Europe of 2.5 percent. The appropriate discount rate for the project is estimated to be 12 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9.4 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89)arrow_forwardThere is a project in DreamLand that an American-based company would like to invest in. The project would require DDD735,000 as initial investment. It is also estimated to generate cash inflows equal to DDD351,000 a year for the next 4 years. After that, the project will be worthless. The current spot exchange rate equals DDD1 = $3.4567. The risk-free rate in DreamLand is 3%, and it is 5% in the U.S.A. The applicable rate of return for projects inarrow_forwardConsider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up. Year 0: -64,000 Euros Year 1: 160,000 Euros Year 2: -100,000 Euros The current exchange rate is $1.60 = 1 Euro. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S. -based firm for a domestic project of this risk is 8 percent. Find the dollar cash flows to compute the dollar - denominated NPV of this project. And also find the euro - zone cost of capital.arrow_forward
- Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,450,000 and is expected to produce cash flows of €4,050,000 in Year 1, €5,050,000 in Year 2, and €5,450,000 in Year 3. The current spot exchange rate is $.74/€ and the current risk-free rate in the United States is 2.9 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 9 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9,950,000. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) X Answer is complete but not entirely correct. NPV $ 3,570,391.95 xarrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is expected to produce cash flows of €1.6 million in Year 1, €2.1 million in Year 2, and €3.2 million in Year 3. The current spot exchange rate is €.94/$ and the current risk-free rate in the United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €7.8 million. What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to 2 decimal places, e.g., 1,234,567.89.) NPVarrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is expected to produce cash flows of €1.6 million in Year 1, €2.1 million in Year 2, and €3.2 million in Year 3. The current spot exchange rate is €.94/$ and the current risk-free rate in the United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €7.8 million. What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. $ 1,404,385.52 X NPVarrow_forward
- Kansas Corp., an American company, has a payment of €5.3 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $5,888,889, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €5.3 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $103,000 for a one-year call option on €5.3 million at an exchange rate of 0.88 €/$. a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas's net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.) Strategy 1 Strategy 2 Net Dollar Cost b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas's net dollar cost for the payable under each strategy? (Round your answer to the nearest whole…arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €20,065,563 and is expected to produce cash flows of €3,524,370 in Year 1, €4,549,121 in Year 2, and €5,590,740 in Year 3. The current spot exchange rate is $1.38/€ and the current risk-free rate in the United States is 3%, compared to that in Europe of 3.08%. The appropriate discount rate for the project is estimated to be 11.07%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €13,733,917. What is the NPV of the project?arrow_forwardLakonishok Equipment has an investment opportunity in Europe. The project costs €14,750,000 and is expected to produce cash flows of €3,350,000 in Year 1, €4,350,000 in Year 2, and €4,750,000 in Year 3. The current spot exchange rate is $.83/€ and the current risk-free rate in the United States is 3 percent, compared to that in euroland of 2.2 percent. The appropriate discount rate for the project is estimated to be 10 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9,250,000. What is the NPV of the project in U.S. dollars? (Round 2 decimal places) NPV : Sarrow_forward
- Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,200,000 and is expected to produce cash flows of €3, 800,000 in Year 1, €4, 800,000 in Year 2, and €5, 200,000 in Year 3. The current spot exchange rate is $.83/€ and the current risk - free rate in the United States is 2.6 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 11 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9, 700,000. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)arrow_forwardConsider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up. Year 0 + -€64,000 Year 1 Year 2 €160,000 -€100,000 The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. Find the euro-zone cost of capital. Write it down in percent with two decimals places.arrow_forwardWithout Using Excel: ABC Company wants to possibly expand its plant in Europe. The current spot exchange rate is for Euro is €0.83. The initial investment is €2.1, with projected cash flows for three years at €950,000. The discount rate is 10%. The risk-free rate in the US is 5 percent and the risk-free rate in Europe is 7 percent. Calculate the NPV of the project into US Dollars, rounding to the nearest cent, format as "XXX,XXX.XX"arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
