International Capital budgeting: AlliedSignal
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With AlliedSignal's proposed automotive plant, suppose that the projected riskless interest rates (APR) in the US and Switzerland are as given here in the excel file.
a) Calculate the spot exchange rates expected one, two, three, four, and five years hence.
b) Calculate the projected incremental cash flow stream in dollars on the basis of the projected spot exchange rates in part a.
c) Calculate the NPV of the project based on the cash flow stream in part b.
In order to calculate the incremental cashflow, you must use the following formula for Part A:
E[s] = s x (1 + r$) / (1 + rSF)
Year 0: $0.60 / SF
Year 1: $0.60 / SF x (1 + 0.08) / (1 + 0.06) = $0.6113 / SF
Year 2: $0.6113 / SF x (1 + 0.09) / (1 + 0.07) = $0.6227 / SF
Year 3: $0.6227 / SF x (1 + 0.09) / (1 + 0.08) = $0.6285 / SF
Year 4 and Year 5 still need to be calculated. In order to calculate the NPV of the project, you will need to use the cashflow determined in Part B.
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Solution Summary
This solution goes through international capital budgeting using the example of AlliedSignal
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