Quantitative Problem: International Machinery Company (IMC) is a Swedish multina
ID: 2726335 • 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 $3,550. IMC estimates that its risk-adjusted cost of capital is 15%. Currently, 1 U.S. dollar will buy 6.3 Swedish kronas. In addition, 1-year risk-free securities in the United States are yielding 6%, while similar securities in Sweden are yielding 5%.
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.
----------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? Round your answer to 2 decimal places. Do not round intermediate calculations.
NPV: ------ Swedish kronas
Rate of return: ------- %
Explanation / Answer
Spot Rate (SR) 1 $ = 6.3 Swedish kronas 1 Year Interest Rate US = 6% 1 Year Interest Rate Sweden = 5% Forword Rate (FR) ? As per Interest Rate Parity, FR (Swedish krona per $) = SR ((Swedish krona per $)) * (1 + PIR ((Swedish krona)^1 /(1 + PIR (($)^1 FR (Swedish krona per $) = 6.3 * (1 + 0.05) / ( 1 + 0.06) 6.24 FR (Swedish krona per $) = 1 $ = 6.24 Swedish kronas Intital Investment $ 2850 Spot Rate (SR) 1 $ = 6.3 Swedish kronas Intital Investment in Swedish Kronas 17955 Swedish Kronas ( $2850 * 6.3) Inflow At Year End $3550 1 Year FR 1 $ = 6.24 Swedish kronas Inflow in Swedish Kronas 22152 Swedish Kronas ( $3550 * 6.24) Cost of Capital 15% PV cash Inflow Cashinflow * PVIFA (Rate, Life) 22152 * PVIFA ( 15% , 1) 22152 * 0.870 19272.24 NPV PV of Cash Inflow - Initial Outflow 19272.24 - 17955 1317.24