he firm purchases a ship to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a ship operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver. The firm is contemplating the following: Acquisition cost € 1,000,000 Years of useful life (economic life) 5 Tax rate 0% Required rate of return on equity 10% Annual revenues € 2,000,000 Operating expenses include only: “Other expenses” of € 1,500,000, plus depreciation. The current exchange rates for USD/EUR: Time 0 1 2 3 4 5 USD per EUR $1.10/ €1 $1.13/ € $1.15/€ 1 $1.17/€1 $1.19/€1 $1.22/€1 Terminology “Spot” price for the Euro, “today” (from Bloomberg) Forward/Futures prices (from futures curve at Chicago Mercantile Exchange) Note: these are also expected spot prices at these dates in the future, via Rational Expectations. RISK ANALYSIS: Address the project risk which results from foreign exchange. For example, what if exchange rates are +/5% higher than expected (i.e. multiply FX rates by 1.05)?
The firm purchases a ship to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a ship operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver.
The firm is contemplating the following:
Acquisition cost € 1,000,000
Years of useful life (economic life) 5
Tax rate 0%
Required rate of
Annual revenues € 2,000,000
Operating expenses include only: “Other expenses” of € 1,500,000, plus depreciation.
The current exchange rates for USD/EUR:
|
Time |
0 |
1 |
2 |
3 |
4 |
5 |
|
USD per EUR |
$1.10/ €1 |
$1.13/ € |
$1.15/€ 1 |
$1.17/€1 |
$1.19/€1 |
$1.22/€1 |
|
Terminology |
“Spot” price for the Euro, “today” (from Bloomberg) |
Forward/Futures prices (from futures curve at Chicago Mercantile Exchange) Note: these are also expected spot prices at these dates in the future, via Rational Expectations. |
RISK ANALYSIS: Address the project risk which results from foreign exchange. For example, what if exchange rates are +/5% higher than expected (i.e. multiply FX rates by 1.05)?
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