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 $2,850 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

If interest rate parity holds

forward exchage rate= spot rate* (1+risk free rate in US)/(1+risk free rate in Sweden)

=(6.3*(1+6%))/(1+5%)

=6.36

forward exchage rate,1 USD=6.36 Swedish krona

Thus 6.36 swedist krona per us dollar will be forward exchange rate.

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.

Initial investment is of $2850 and exchange rate is 1USD= 6.3 Swedish Kronas

Thus 2850 will correspond to 2850*6.3=17955 Swedish Kronas

A cash inflow the following year of $3,550 and forward exchange rate is 1USD = 6.36 Swedish Kronas

Thus 3350 will correspond to 3350*6.36=21306 Swedish Kronas

Initial Investment= 17955

Year 1 cash flow = 21306 Swedish Kronas

IMC estimates that its risk-adjusted cost of capital is 15%

Thus PV of a cash flow= 21306/(1+15%)

PV of a cash flow=18526.96

NPV= PV of a cash flow- initial investment

=18526.96-17955

NPV=571.96 Swedish kronas

Rate of return= Final- initial invesment/ initial investment*100

=(21306-17955)/17955*100

Rate of return=18.66%

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