Forecast of future exchange rates

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A year ago, the spot exchange rate of the euro was $1.20. At that time, Talen Co. (a U.S. firm) invested $4 million to establish a project in the Netherlands. It expected that this project would generate cash flows of 3 million euros at the end of the first and second years. Talen Co. always uses the spot rate as its forecast of future exchange rates. It uses a required rate of return of 20 percent on international projects. Because conditions in the Netherlands are weaker than expected, the cash flows in the first year of the project were 2 million euros, and Talen now believes the expected cash flows for next year will be 1 million euros. A company offers to buy the project from Talen today for $1.25 million. Assume no tax effects. Today, the spot rate of the euro is $1.30. Should Talen accept the offer? Show your work.

Reference no: EM131042804

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