Capital Budgeting
You are evaluating your company’s financing requirements for the next year in the Japanese market, as opposed to domestic financing in the United States.
The current borrowing rate in Japan is 8% for firms of your risk level. You are looking to borrow ¥1,000,000, and considering sources in Japan. You have identified the possible rate changes in that market for the Yen as follows:
| Possible Rate Changes | Probability |
| No Change | 0.2 |
| 1% | 0.4 |
| 3% | 0.3 |
| 5% | 0.1 |
Your company would like to commit to borrowing in this market, but would like to know the effective rate of interest for borrowing ¥1,000,000.
Required:
What is the effective rate of interest your company would have to pay in Japanese Yen to finance the project in Japan?
Part TwoAcc: Foreign Investment
Your U.S. company has the opportunity for an investment in a Canadian oil project that will generate $1,200,000 CAD each year for the next three years.
Your company must invest $2,000,000 USD in order to obtain the project. The cost of capital for your company is 12% and the spot rate for the CAD is expected to be $0.80, $0.82, and $0.79 for the next three years, respectively.
Required:
- What is the NPV of this project and should your company make the investment?
- What is the IRR of this project?
- Should your company make the investment? Why or why not?
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