Accounting for Country Risk of a Project
Response to the following problem:
Slidell Co. (a U.S. ?rm) considers a foreign project in which it expects to receive 10 million euros at the end of this year. It plans to hedge receivables of 10 million euros with a forward contract. Today, the spot rate of the euro is $1.20, while the one-year forward rate of the euro is presently $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay is $7 million. Slidell has a required return of 18 percent.
There is a 20 percent chance that political problems will cause a reduction in foreign business, such that it would only receive 4 million euros at the end of one year. Determine the expected value of the net present value of this project.