Atro Co. (a U. S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one 522 Part 4: Long-Term Asset and Liability Management Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203year. Although it realizes that its receivables are uncertain, it decides to hedge receivables of 10 million euros with a forward contract today. As of today, the spot rate of the euro is $1.20, while the one-year forward rate of the euro is presently $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay of this project is $7 million. Atro has a required return of 18 percent. Required:
a. Estimate the NPV of this project based on the expectation of 10 million euros in receivables.
b. Now estimate the NPV based on the possibility that country risk could cause a reduction in foreign business, such that Atro Co. only receives 4 million euros instead of 10 million euros at the end of 1 year. Estimate the net present value of the project if this form of country risk occurs.