International Machinery Company (IMC) is a Swedish multinational manufacturing c

Question

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 $2,900 and a cash inflow the following year of $3,900. IMC estimates that its risk-adjusted cost of capital is 19%. Currently, 1 U.S. dollar will buy 6.4 Swedish kronas. In addition, 1-year risk-free securities in the United States are yielding 3%, while similar securities in Sweden are yielding 2%. 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

a. If the interest parity holds, what is the forward exchange rate of Swedish krona per U.S. dollar?

F = Spot Rate * (1+Rd) /(1+Rf)

= 6.4 Swedish kronas * (1+0.02)/ (1+0.03)

= 6.34 Swedish kronas per 1 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?

NPV is 2,218 Swedish kronas

Rate of return = 24,726-18,560/ 18560 = 33.22%

Year Cash flows PVF @19% PV $ 0 (18,560)          1.0000       (18,560) ($2900*6.4) 1 24,726          0.8403        20,778 ($3900*6.34) NPV         2,218

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