Copper International is a U.S. based company that would like to invest in a project in Europe. The initial cost of the project is €12 million. It is expected to generate a cash flow of €5.4 million each year in the next three years. The current spot exchange rate is €0.8/$. The current risk-free rates in the United States and Europe are 3 percent and 5 percent, respectively. The cost of capital for Copper on U.S. dollar investments is estimated to be 9 percent.

(a) Calculate the projected exchange rate each year over the life of the project. Do you expect the U.S. dollar to appreciate or depreciate relative to the Euro during this period?

(b) Calculate the NPV of the project using the home currency approach.

(c) Assume that the international Fisher effect holds. Calculate the NPV of the project using the foreign currency approach.

(d) You notice that the spot exchange rate for the Swiss franc is SF per $1 = 1.7, and the cross-rate is € per SF = 0.40. Do you think this is a fair rate? Why? If not, what would a fair cross-rate be?

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a To calculate the projected exchange rate each year over the life of the project we need to consider the expected exchange rate movements based on the interest rate differentials between the United S... View the full answer