Tourism in Thailand

International Finance

Quiz

Q3

Since the aim is to calculate „real“ NPV of the project it is not feasible to discount a EURO funded cash flow with the subsidized interest rate.

A problem with cash flows noted in USD is that we only have an average forward rate to transform payments, which makes the NPV’s result imprecise. Further more this prohibits from translating the USD result in period 4 to EUR without loss of precision since we don’t now the individual forward rate fort hat period. This makes it hard to evaluate the funding strategy.

Another weakness is that neither the euro-funded version with 3.5% nor the dollar-funded version with 6.5% interest rate account for counterparty risk as a part of the projects cost. Counterparty risk is present in this case as the customer is rumored be ask for debt rescheduling.

Since only that last option seems to contain some kind of risk premium I appears to be favorable. The precise risk premium on AR from my point of view (calculus) would be 2.22% for the counterparty risk, derived from the information provided in the credit insurance (2% /9 *10, to strip the contract from incentive managing engineering). To transform the premium on the borrowed amount the calculus is: 2.22*10/8.8333=2.513 which is the difference of the unsecured (counterparty risk) and the secured dollar-funded version.

Ergo I suggest computing the NPV according to the last possibility.

Moritz W. Cremer

BSc Business Administration, University of Münster

Student of MSc Finance, EBS Business School

Phone: +49 176 60911364

E-mail: Cremer.Moritz@gmx.de