Foreign Capital Budgeting
Data: Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire'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 $1,000 and a cash inflow of $1,200. Solitaire estimates that the risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 0.90 Swiss franc. In addition, 1-year risk free securities in the United States are yielding 5%, while similar securities in Switzerland are yielding 3.25 %.
Questions:
a. If the project was instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?
b. What is the expected forward exchange rate 1 year from now?
c. If Solitaire undertakes the project, what is the net present value and rate of return of the project for Solitaire?