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Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the equipment for their production line and sell the product to Spain and Portugal in Euro. The company expects to receive 550,000 Euros in one year from selling the products in Portugal where it already does much of its business. In addition, Sazer Co. also expects to receive 250,000 Euros in one year from sales to Spain. However, these cash flows are very uncertain because the company has no existing business in Spain and there might be 15% of risk of default of accounts payable by Spanish companies and therefore, there might be risk of a 15% account receivable of a US firm.
Assume that the Euro’s spot rate will be $1.25 in one year. Also, assume the value of the equipment mentioned above after one year will be $600,000. It will pursue the project only if it can satisfy its required rate of return of 24 %. It decides to hedge all the expected receivables because of business in Portugal, and none of the expected receivables because of business in Spain.
Estimate the Expected Net Present Value (NPV) of the project. Show your calculations.