International Financial Capital Budgeting
How do international factors affect decision making? Although the same basic principles of capital budgeting apply to both foreign and domestic operations, there are some key differences. For example, cash flows must be converted into the parent company’s currency, so they are subject to exchange rate risk. In addition, the cost of capital may be different for a foreign project compared with an equivalent domestic project.
For this Assignment, complete Problem 1917, Parts a, b, and c on page 680 of your course text. This case examines the effects of exchange rates on net present values and rates of return.
1917
FOREIGN CAPITAL BUDGETING Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering undertaking a 1year project in the United States. The project’s expected dollardenominated cash flows consist of an initial investment of $1,000 and a cash inflow the following year of $1,200. Solitaire estimates that its riskadjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 0.90 Swiss franc. In addition, 1year riskfree 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 riskadjusted cost of capital, what would be the net present value and 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 rate of return of the project for Solitaire?
In addition to solving for the rates of return from the U.S. and Swiss points of view, write a paragraph that summarizes your key learning points from this case. Be sure to include your calculations as an appendix.
Submit your Application (both your Excel and Word files) by Day 7.
General Guidance on Assignment Length:
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