Currency Exchange Rate

Question

Global electronics Inc. invested $1,000,000 to build a plant in a foreign country.  The labor and materials used in production 
are purchased locally.  The plant expansion was estimated to produce an internal rate of retuurn of 20% in U.S. dollar terms.
Due to a currency crisis, the currency exchange rate between the local currency and the U.S. dollar doubled from two local 
units per U.S. dollar to four local units per U.S. dollar.
 
1. Assume that the plant produced and sold product in the local economy.  Explain what impact this change in the currency 
    exchange rate would have on the project's internal rate of return.

Answer 1

A lot depends upon how the project was financed and if foreign currency earnings were hedged. If the New plant was funded in the foreign currency than the assets and liabilites will offset and there will be little exposure ther. If all product produced in that country are sold in that country then local currency profits will be little changed. However if the future profits were not hedged, the dollar value of those cash flows will be half what they were seriously reducing the IRR.