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 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)?