Reference no: EM132964945
JohnSmith Products, a Canadian auto part manufacturing firm, has an investment opportunity in Europe. The project costs €18 million and is expected to have cash flows as follows for three years. And the subsidiary can be sold at the end of three years for €12.7 million.
The following is the summary of the financial information between Canada and Europe.
Initial Invest -€18,000,000
CF1 € 3,600.000
CF2 € 4,100,000
CF3 € 5, 100,000
Terminal value at the end of Year 3 €12,700,000
Spot exchange rate (S0) 1.11CAD/€
Risk-free rate in Canada 0.038
Risk-free rate in Europe 0.029
Cost of capital in Canada 0.105
Problem a. Compute the forward exchange rates for the Year 1, Year 2, and Year 3.
Problem b. Compute the NPV of this project.
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