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Exchange Rate Effects on NPV

The German multinational manufacturing firm, Siemens Industries, is debating whether to invest in a 2 year project in the United States.

The project's expected dollar cash flow consists of an initial investment of $2M with cash inflows of $1.4M in year 1 and $1.2 M in year 2.

The risk adjusted cost of capital for this project is 15%.

The current exchange rate is 1.10 Euros per USD.

Risk free rates in the US and the Eurozone are:

Year 1 2

US 4% 4.25%

EuroZone 3% 3.25%

a. If the project were undertaken by a US based company (with no exchange rate issues), what would be the NPV of the project?

b. What is the expected forward exchange rate 1 year from now and 2 years from now? Please do this from the German perspective.

c. If Siemens undertakesExchange Rate Effects on NPV The German multinational manufacturing firm, Siemens Industries, is debating whether to invest in a 2 year project in the United States.

The project's expected dollar cash flow consists of an initial investment of $2M with cash inflows of $1.4M in year 1 and $1.2 M in year 2.

The risk adjusted cost of capital for this project is 15%.

The current exchange rate is 1.10 Euros per USD.

Risk free rates in the US and the Eurozone are:

Year 1 2

US 4% 4.25%

EuroZone 3% 3.25%

a. If the project were undertaken by a US based company (with no exchange rate issues), what would be the NPV of the project?

b. What is the expected forward exchange rate 1 year from now and 2 years from now? Please do this from the German perspective.

c. If Siemens undertakes the project, what is the NPV of th,e project (from the German perspective)?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92070420

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