A U.S. company sells goods to a Canadian company for 8 million Canadian dollars, purchases supplies from Canadian companies for 7 million Canadian dollars, and incurs interest expense of 4 million Canadian dollars on Canadian loans. The exchange rate is C$/US$1.014. (1) Calculate the US$ value of the company's cash flows; (2) Would the US$ value of the cash flows increase or decrease with an exchange rate of C$/US$.98 and how much? Show how you derive your answers.
A U.S. company sells goods to a Canadian company for 8 million Canadian dollars, purchases supplies from Canadian companies for 7 million Canadian dollars, and incurs interest expense of 4 million Canadian dollars on Canadian loans. The exchange rate is C$/US$1.014. (1) Calculate the US$ value of the company's cash flows; (2) Would the US$ value of the cash flows increase or decrease with an exchange rate of C$/US$.98 and how much? Show how you derive your answers.
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Dr. No, the CFO of Spectre Company has recently identified an island off the coast of Jamaica that he believes contains a large population of special snakes. The venom from these snakes can be used to fight cancer and the drug created from the venom could be quite profitable. The owners of the island have offered to sell it to Spectre for $9 million. Spectre would also be faced with additional initial costs of $8 million to engineer the equipment that will extract the venom from the snakes. Spectre is an environmentally aware firm and has agreed to return the snakes to the island.
The snake population would provide enough venom to last for five years and although the drug will be sold throughout the world, all operating cash flows are denominated in US dollars. The following information has been made available to Dr. No:
| Year | One | Two | Three through Five |
| Revenues | $24 million | $25 million | $27 million |
| Operating Expenses (excluding depreciation) | $17 million | $19 million | $20 million |
| Depreciation Percentages | 25% | 57% | |
| Interest Expense | $1 million | $1 million | $1 million |
The asset purchased will be financed with a $12 million bond issue: the coupon rate is 5.12%, five years until maturity, and a price of $974. The remainder of capital will consist of an issue of common stock priced at $53. The shares of Spectre common stock have a beta of 1.62, while the risk-free rate of interest is 2.75%. A portfolio of well-diversified stocks has a beta of 1.0 and an expected return of 9.65%.
Remember that land cannot be depreciated and Spectre pays a 35% marginal tax rate. Spectre will be required to remove all evidence that it harvested the snakes and return the island to its original condition. This will cost $1 million and will be incurred at the end of year five. Spectre also expects to purchase a small island nearby at the end of year 3 that is owned by the Canadian government for CAD2 million. Current spot rate is CAD1.06/USD, but Spectre expects the USD to depreciate to CAD0.98/USD two years from today.
Determine the net present value in USD for this project.
Show Operating Cash Flow table and WBAC calculation
