Etemadi .Amalgamated a U.S. manufacturing firm, is considering a new project in

ID: 2756950 • Letter: E

Question

Etemadi .Amalgamated a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etemadi's corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are shown here: You know that the spot exchange rate is 5 = $1.1677 / In addition, the risk-free interest rate on dollars is 5.8% and the risk-free interest rate on euros is 5.7%. Assume that these markets are internationally integrated and the uncertainty in the FCFs is not correlated with uncertainty in the exchange rate. You determine that the dollar WACC for these cash flows is 8.4%. What is the dollar present value of the project? Should Etemadi .Amalgamated undertake the project? The dollar net present value of the project is (Round to three decimal places.)

Explanation / Answer

Net present value of project = Present value of cash Inflow - Present value of cash outflow

= $34.75788904 - 26.06424

=$ 8.693649 Million

Present value of Free cash flows

Particulars

Y=0

Y=1

Y=2

Y=3

Y=4

Free cash flow (€ Million)

-22.30

9.3

14.8

6.2

5.1

Free cash flow ($ Million)

(FR = $1.1688)

-22.30* 1.1688

= -26.06424

9.3 * 1.1688

= 10.86984

14.8*1.1688

=17.29824

6.2*1.1688

= 7.24656

5.1*1.1688

= 5.96088

Present value factor (8.4%)

0.923

0.851

0.785

0.724

PV of cash inflow

-26.06424

10.03286232

14.7208

5.6885496

4.31567712

According to IRPT, rate

FR($) = SR($) * (1 + R$) / ( 1 + R€)

= $1.1677 * (1 + 0.058) / (1+ 0.057)

= $ 1.1688