You work for Funky Turtle Limited, which is a firm whose home currency is the Australian dollar (AUD) and that is considering a foreign investment. The investment yields expected after-tax Danish krone (DKK) cash flows (in millions) as follows: Year 0 -DKK1,400 Year 1 DKK625 Year 2 DKK625 Oa. The NPV from the project's perspective is -AUD 65.44 million O b. The NPV from the project's perspective is -AUD 63.04 million O c The NPV from the project's perspective is -AUD 59.41 million O d. The NPV from the project's perspective is -AUD 61.92 million Qe. The NPV from the project's perspective is -AUD 63.69 million Year 3 DKK625 Expected inflation is 5.0% in the Australian dollar and 9.0% in the Danish krone. Assume that the international parity conditions hold. Required returns for projects in this risk class are: • For AUD: 17.0% in Australian dollar; and • For DKK: 21.457% in Danish krone The spot exchange rate is SAUD/DKK = AUD 0.2419/DKK. The project country's government has Danish krone-denominated bonds outstanding that currently yield 6.09% per annum. Your firm pays a marginal corporate tax rate of 25% on its Danish krone profits, which is the same marginal tax rate that your firm pays on its parent company profits in Australian dollar. Suppose that all of the Danish krone cash flows generated by the project must be loaned to the country's government at an interest rate of 0% per annum until one year after the completion of the project (i.e. until t=4). Factoring in the opportunity cost of the blocked funds, what is the NPV of Funky Turtle's project?
You work for Funky Turtle Limited, which is a firm whose home currency is the Australian dollar (AUD) and that is considering a foreign investment. The investment yields expected after-tax Danish krone (DKK) cash flows (in millions) as follows: Year 0 -DKK1,400 Year 1 DKK625 Year 2 DKK625 Oa. The NPV from the project's perspective is -AUD 65.44 million O b. The NPV from the project's perspective is -AUD 63.04 million O c The NPV from the project's perspective is -AUD 59.41 million O d. The NPV from the project's perspective is -AUD 61.92 million Qe. The NPV from the project's perspective is -AUD 63.69 million Year 3 DKK625 Expected inflation is 5.0% in the Australian dollar and 9.0% in the Danish krone. Assume that the international parity conditions hold. Required returns for projects in this risk class are: • For AUD: 17.0% in Australian dollar; and • For DKK: 21.457% in Danish krone The spot exchange rate is SAUD/DKK = AUD 0.2419/DKK. The project country's government has Danish krone-denominated bonds outstanding that currently yield 6.09% per annum. Your firm pays a marginal corporate tax rate of 25% on its Danish krone profits, which is the same marginal tax rate that your firm pays on its parent company profits in Australian dollar. Suppose that all of the Danish krone cash flows generated by the project must be loaned to the country's government at an interest rate of 0% per annum until one year after the completion of the project (i.e. until t=4). Factoring in the opportunity cost of the blocked funds, what is the NPV of Funky Turtle's project?
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 1ST
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Question
Transcribed Image Text:You work for Funky Turtle Limited, which is a firm whose home currency is the Australian dollar (AUD) and that is considering a foreign investment. The investment yields expected after-tax Danish krone (DKK) cash flows
(in millions) as follows:
Year 0
-DKK1,400
Year 1
DKK625
Year 2
DKK625
Year 3
DKK625
Expected inflation is 5.0% in the Australian dollar and 9.0% in the Danish krone. Assume that the international parity conditions hold.
Required returns for projects in this risk class are:
• For AUD: 17.0% in Australian dollar; and
• For DKK: 21.457% in Danish krone
O a.
The NPV from the project's perspective is -AUD 65.44 million
O b. The NPV from the project's perspective is -AUD 63.04 million
O c. The NPV from the project's perspective is -AUD 59.41 million
O d. The NPV from the project's perspective is -AUD 61.92 million
O e. The NPV from the project's perspective is -AUD 63.69 million
The spot exchange rate is SAUD/DKK = AUD 0.2419/DKK.
The project country's government has Danish krone-denominated bonds outstanding that currently yield 6.09% per annum. Your firm pays a marginal corporate tax rate of 25% on its Danish krone profits, which is the
same marginal tax rate that your firm pays on its parent company profits in Australian dollar.
Suppose that all of the Danish krone cash flows generated by the project must be loaned to the country's government at an interest rate of 0% per annum until one year after the completion of the project (i.e. until t=4).
Factoring in the opportunity cost of the blocked funds, what is the NPV of Funky Turtle's project?
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