Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar- denominated cash flows consist of an initial investment of $1,000 and a cash inflow the following year of $1,200. Solitaire estimates that its risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy .90 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 5%, while similar securities in Switzerland are yielding 3.25%.
A. If this project was instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital, what would be the net present value and the rate of return generated by this project?
B. What is the expected forward exchange rate 1 year from now?
C. If Solitaire undertakes the project , what is the net present value and the rate of return of the project for Solitaire?
D. What are the key learning points from this case?