Quantitative Problem: International Machinery Company (IMC) is a Swedish multina
ID: 2718585 • Letter: Q
Question
Quantitative Problem: International Machinery Company (IMC) is a Swedish multinational manufacturing company. Currently, IMC's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2,850 and a cash inflow the following year of $3,400. IMC estimates that its risk-adjusted cost of capital is 16%. Currently, 1 U.S. dollar will buy 6.0 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? Round your answer to 2 decimal places. Do not round intermediate calculations.
b.) If IMC undertakes the project, what is the net present value and rate of return of the project for IMC in home currency? Round your answer to 2 decimal places. Do not round intermediate calculations.
Explanation / Answer
a) Forward Exchange Rate Forward Rate = Spot Rate X (1 + Interest Rate of Overseas country) (1 + Interest Rate of Domestic country) = 0.166667 + (1+5) (1+4) = 1.367 b) Project Year Cash Flow PV factor@16% PV of cash Inflows 0 17100 1 -17100 1 20400 0.862 17586.21 NPV 486.2069 Rate of Return 16.17647059