International Capital Budgeting - Exercise Question 1 Damai Berhad is considering investing in a project in Iceland with an initial cost of €200,000. The project is expected to generate return of €75,000 the first year, €95,000 the second year and €180,000 the third and final year. The current spot rate is €0.4086 per USD1. The nominal risk-free return is 5.5% in Europe and 6% in the US. The return relevant to the project is 12% in the US. Assume that uncovered interest parity exists. From the above information you are required to: a. Calculate the Net Present Value of the project in US dollar using home currency approach. b. Should Damai Berhad proceed with the project? Justify. Solution: - a. Initial cost €200,000 = Year Return 1 €75,000 2 €95,000 3 €180,000 4 €180,000

International Capital Budgeting - Exercise Question 1 Damai Berhad is considering investing in a project in Iceland with an initial cost of €200,000. The project is expected to generate return of €75,000 the first year, €95,000 the second year and €180,000 the third and final year. The current spot rate is €0.4086 per USD1. The nominal risk-free return is 5.5% in Europe and 6% in the US. The return relevant to the project is 12% in the US. Assume that uncovered interest parity exists. From the above information you are required to: a. Calculate the Net Present Value of the project in US dollar using home currency approach. b. Should Damai Berhad proceed with the project? Justify. Solution: - a. Initial cost €200,000 = Year Return 1 €75,000 2 €95,000 3 €180,000 4 €180,000

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 28QA

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