The Strik-it-Rich Gold Mining Company is a U.S. multinational firms and considering investing in a project...

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The Strik-it-Rich Gold Mining Company is a U.S. multinationalfirms and considering investing in a project inGermany. The cost of the investment project is €100million. This cost occurs at the beginning of the year. Thereturning cash flow of this project is €120 million. Assume thereturning cash flows happen at the end of the year. The firm’s costof capital in the U.S. is 10%. The current exchange rate isS₀($/€)= $1.20/€. Strik-it-Rich’s managementis, however, concerned with the possibility that the exchange ratemay change quit a bit because of the potential withdrawal of theUnited Kingdom from the European Union. The firm estimates that theexchange rate at the end of the year could either beS₀($/€)= $1.00 or S₀($/€)=$1.40.
-find the net present value (NPV) of this project in U.S.dollars, if S₀($/€)is still $1.20/€ at the endof the year.
- find the net present value (NPV) of this project in U.S.dollars, if S₀($/€)is $1.00/€ or $1.40/€ at theend of the year.
- There are one-year call options on the exchange rates with theexercise price ofS($/€)= $1.20/€. The price paid to buythe call option contracts is $0.01 million for purchasing 1 millionU.S. dollars. Please find the NPV if the mining company use calloptions.
- Instead of using call option contracts, the mining company canalso use the real option. The exchange rate should become clearwithin a year. If the company has the option to delay thisexpansion plan for a year, please find the NPV after the companydelays the expansion. Assume the exchange rate would not change inthe next year.

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4.5 Ratings (815 Votes)

Initial investment in terms C0 100 million x S0 100 million x120 120 mn Cash flows in year 1 in terms C1 120 million x S1 The firms cost of capital in the US is 10 R Find the net present value NPV See Answer

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The Strik-it-Rich Gold Mining Company is a U.S. multinationalfirms and considering investing in a project inGermany. The cost of the investment project is €100million. This cost occurs at the beginning of the year. Thereturning cash flow of this project is €120 million. Assume thereturning cash flows happen at the end of the year. The firm’s costof capital in the U.S. is 10%. The current exchange rate isS0($/€)= $1.20/€. Strik-it-Rich’s managementis, however, concerned with the possibility that the exchange ratemay change quit a bit because of the potential withdrawal of theUnited Kingdom from the European Union. The firm estimates that theexchange rate at the end of the year could either beS0($/€)= $1.00 or S0($/€)=$1.40.-find the net present value (NPV) of this project in U.S.dollars, if S0($/€)is still $1.20/€ at the endof the year.- find the net present value (NPV) of this project in U.S.dollars, if S0($/€)is $1.00/€ or $1.40/€ at theend of the year.- There are one-year call options on the exchange rates with theexercise price ofS($/€)= $1.20/€. The price paid to buythe call option contracts is $0.01 million for purchasing 1 millionU.S. dollars. Please find the NPV if the mining company use calloptions.- Instead of using call option contracts, the mining company canalso use the real option. The exchange rate should become clearwithin a year. If the company has the option to delay thisexpansion plan for a year, please find the NPV after the companydelays the expansion. Assume the exchange rate would not change inthe next year.