The US based company is investing in a 2-year project in Europe. The initial investment is €10,000. The expected cash inflow in the year one is €6,000 and in the year two is €8,000. The risk-free rate in US is 3% and Europe 2%. If the spot rate is $1.25/€ and the required rate of return of the project is 14%, calculate the NPV of the project in dollars. (A) The NPV of the project in dollars is S1,773.62. (B) The NPV of the project in dollars is $1,704.32. (C) The NPV of the project in dollars is S1.418.90. (D) The NPV of the project in dollars is $1,989,74

The US based company is investing in a 2-year project in Europe. The initial investment is €10,000. The expected cash inflow in the year one is €6,000 and in the year two is €8,000. The risk-free rate in US is 3% and Europe 2%. If the spot rate is $1.25/€ and the required rate of return of the project is 14%, calculate the NPV of the project in dollars. (A) The NPV of the project in dollars is S1,773.62. (B) The NPV of the project in dollars is $1,704.32. (C) The NPV of the project in dollars is S1.418.90. (D) The NPV of the project in dollars is $1,989,74

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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5. Suppose you are evaluating the following potential investment project: Spend $34 million today on a factory in Alabama that will be completed in 1 year. You expect to receive $12 million in profits from this factory at the end of the second year, at which time you also expect to sell the factory to Toyhonda, a Japanese competitor, for a further $30 million. The market interest rate is 9%. (Assume the inflation rate is constant at 0, and is expected to remain so for the duration of the above investments.) Would this plan generate profits enough to cover the investment cost? Yes b. No c. break-even (i.e., no profit nor loss) a.
Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and political conditions. The spot rate of the Argentina peso in 1 year is expected to be $.40 based on these conditions. However, it wants to also account for the 10 percent probability of a political crisis in Argentina, which would change the expected cash flows to 4 million Argentine pesos in 1 year. In addition, it wants to account for the 20 percent probability that the exchange rate may only be $.36 at the end of 1 year. These two forms of country risk are independent. Drysdale’s required rate of return is 25 percent and its initial outlay for this project is $1.4 million. Show the distribution of possible outcomes for the project’s net present value (NPV).
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$10,000,000 (Singapore dollars). The required rate of return is expected to be 15.00% for all four years of the project. _____________________________ Year 0 Year 1 Year 2 Year 3 Year 4 Cash Flows to Parent, excluding Salvage Value $2,500,000 $2,500,000 $3,400,000 $3,800,000 Initial Investment $10,000,000 Which of the following most closely approximates the break-even salvage value? $2,938,788 $2,671,625 $2,137,300 $2,404,463
The US based company is investing in a 2-year project in Europe. The initial investment is €10,000. The expected cash inflow in the year one is €6,000 and in the year two is €8,000. The risk-free rate in US is 3% and Europe 2%. If the spot rate is $1.25/€ and the required rate of return of the project is 14%, calculate the NPV of the project in dollars. (A) The NPV of the project in dollars is $1,773.62. (B) The NPV of the project in dollars is $1,704.32. (C) The NPV of the project in dollars is $1,418.90. (D) The NPV of the project in dollars is $1,989.74.
Question: You have an investment opportunity in the United Kingdom that requires investment of $500,000 today and will produce a cash flow of 320,000 euros and one year with no risk. Suppose the risk free rate of interest in the UK is 6% and the current competitive exchange rate is one point 70 per euro. What is the NPV of this project? Would you take the project?
You want to invest in a riskless project in Australia. The project has an initial cost of AUD3.86 million and is expected to produce cash inflows of AUD 2 million a year for four years. The project will be worthless after four years. The expected inflation rate in Australia is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is AUD7.7274. What is the net present value of this project in Australian Dollar if the international Fisher effect applies?

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