1. Your company is considering building a plant which produces coin-operated cappuccino machines in Japan. The project costs ¥ 1,000,000 (year 0) and is expected to generate a cash flow of ¥ 500,000, ¥ 600,000, and ¥ 400,000 in the next three following years (years 1, 2, and 3; no cash flow is generated after year 3). Your company's required dollar rate of return on projects of similar risk is 10%. Inflation in the US and Japan is expected to be 3% and 2%, and the current spot rate is ¥ 125/$.
Assume that the international parity relations hold. Calculate the NPV of the project in dollars.
2. USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FIVE QUESTIONS A U.S. firm holds an asset in Great Britain and faces the following scenario:
|
|
State 1
|
State 2
|
2 State 3
|
|
Probability
|
25%
|
50%
|
25%
|
|
Spot rate
|
$2.20/£
|
$2.00/£
|
$1.80/£
|
|
P*
|
£2,000
|
£2,500
|
£3,000
|
|
P
|
$4,400
|
$5,000
|
$5,400
|
Where,
P* = Pound sterling price of the asset held by the U.S. firm
P = dollar price of the same asset
(a) What is the expected value of the investment in U.S. dollars?
(b) What is the variance of the exchange rate?
(c) What is the "exposure coefficient" (i.e. the regression coefficient beta)?
(d) What is the volatility of the dollar value of the British asset [i.e. Var(P)]?
(e) Var(e) represents the residual part of the dollar value variability that is independent of exchange rate movements. What is the Var(e)?
3. Your company is considering building a plant which produces coin-operated cappuccino machines in Japan. The project costs ¥ 1,000,000 (year 0) and is expected to generate a cash flow of ¥ 500,000, ¥ 600,000, and ¥ 400,000 in the next three following years (years 1, 2, and 3; no cash flow is generated after year 3). Your company's required dollar rate of return on projects of similar risk is 10%. Inflation in the US and Japan is expected to be 3% and 2%, and the current spot rate is ¥ 125/$.
Assume that the international parity relations hold. Calculate the NPV of the project in dollars