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## Q. 21.FSE.11

A year ago, the spot exchange rate of the euro was \$1.20. At that time, Talen Co. (a U.S. firm) invested \$4 million to establish a project in the Netherlands. It expected that this project would generate cash flows of 3 million euros at the end of the first and second years.
Talen Co. always uses the spot rate as its forecast of future exchange rates. It uses a required rate of return of 20 percent on international projects.
Because conditions in the Netherlands are weaker than expected, the cash flows in the first year of the project were 2 million euros, and Talen now believes the expected cash flows for next year will be 1 million euros. A company offers to buy the project from Talen today for \$1.25 million. Assume no tax effects. Today, the spot rate of the euro is \$1.30. Should Talen accept the offer? Show your work.

## Verified Solution

As of today, the NPV from selling the project is:
Proceeds received from selling the project – Present value of the forgone cash flows.
Proceeds \$1.25 million.
PV of forgone cash flows = (1,000,000 × \$1.30)/1.2 = \$1,083,333.
The NPV from selling the project is \$1,250,000 – \$1,083,333 = \$166,667

Therefore, selling the project is feasible.