Capital Budgeting with Hedging
Response to the following problem:
Baxter Co. considers a project with Thailand's government. If it accepts the project, it will definitely receive one lump-sum cash flow of 10 million Thai baht in 5 years. The spot rate of the Thai baht is presently $.03. The annualized interest rate for a 5-year period is 4 percent in the United States and 17 percent in Thailand. Interest rate parity exists. Baxter plans to hedge its cash flows with a forward contract.
What is the dollar amount of cash flows that Baxter will receive in 5 years if it accepts this project?