Question: Suppose that Bosa Co., a U.S.-based MNC, has been offered a project by the government of Brazil. The project lasts for a period of one
Suppose that Bosa Co., a U.S.-based MNC, has been offered a project by the government of Brazil. The project lasts for a period of one year and would require a 1,000,000 Brazilian real (R) investment in the project immediately. The spot rate of the real is currently $0.30, however Bosa forecasts that the real will depreciate to $0.20 by next year.
In order to pay for the initial investment, Bosa would need to borrow dollars at an interest rate of 15.00%. The project is expected to generate cash flows of R1,400,000.
Suppose that Bosa and the Brazilian government decide to engage in a parallel loan, in which each party simultaneously loans the other party a certain amount to be repaid at a specific time in the future. Suppose that Bosa will loan the Brazilian government $300,000, which will be repaid with interest in one year at a rate of 10.00%. The government of Brazil will loan Bosa R1,000,000, which will be repaid with interest in one year at a rate of 15.00%.
Complete the second column of the table, filling in the interest paid on the real loan and the net real cash flows for Bosa in year 1 of the project.
| Bosa Real Cash Flows | ||
|---|---|---|
| Year 0 | Year 1 | |
| Loan from Brazilian Government | R1,000,000 | |
| Investment in Project | R1,000,000 | |
| Interest Paid on Loan of R1,000,000 | R ? | |
| Repayment of Loan Principal | R1,000,000 | |
| Project Cash Flow | R1,400,000 | |
| Net Cash Flow | 0 | R ? |
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts