
To find: The NPV (
Introduction:
International capital budgeting estimates the decisions on investment that are related to the changes in the rate of exchange. There are two methods under international capital budgeting which are as follows:
Home currency approach:
In this approach, “NPV” is ascertained on converting “foreign cash flows” into domestic currency.
Foreign currency approach:
In this approach, “foreign discount rate” is computed to find the NPV of foreign cash flows. Then, the NPV is converted into dollars.

Answer to Problem 14QP
The NPV is $514,147.1888.
Explanation of Solution
Given information:
Company L that manufactures equipment has an investment opportunity in Country E. The cost of the project is €12 million, the expected cash follow in year 1 is €1.8 million, in year 2 is €2.6 million, and in year 3 is €3.5 million.
The present spot exchange rate is $1.36 for a euro, the present risk-free rate in Country U is 2.3% compared to Country E, which is 1.8%. The current rate of discount for a project is 13%; Country U’s cost of capital for the company. The sale of the subsidiary can take place at the end of t3 years that have an projected cost of €8.9 million.
Computation of the net
The net present value is computed by the following steps:
- At first, it is essential to determine the expected exchange rate for the corresponding 3 years by dividing one plus Country U’s nominal risk-free interest rate with one plus Continent E nominal risk-free interest rate by the power value of the subsequent year, then multiply it by spot rate.
- Secondly, it is essential to determine the dollar cash flows by multiplying the expected exchange rate of the corresponding years with the subsequent years’ project cost.
- Finally, determine the NPV with the computed dollar cash flows.
Formula to calculate the expected exchange rate:
E (S1) refers to “expected exchange rate” in t periods,
RUS refers to Country U’s nominal risk-free interest rate,
RFC refers to foreign country nominal risk-free interest rate,
t refers to number of years.
Computation of the expected exchange rate for year 1:
Hence, the expected exchange rate for year 1 is $1.366679764 for a €.
Computation of the expected exchange rate for year 2:
Hence, the expected exchange rate for year 2 is $1.37339233675 for a €.
Computation of the expected exchange rate for year 3:
Hence, the expected exchange rate for year 3 is $1.3801378786 for a €.
Formula to calculate the dollar cash flows:
Computation of the dollar cash flows in the initial year:
It is given that the expected project cost is €12,000,000 and $1.36/€ is the current spot rate.
Hence, the dollar cash flow in year 0 is - $16,320,000.
Computation of the dollar cash flows in year 1:
It is given that the expected cash flow is €1,800,000 in year 1 and computed “expected exchange rate” for year 1 is $1.366679764/€.
Hence, the dollar cash flow in year 1 is $2,460,023.575.
Computation of the dollar cash flows in the year 2:
It is given that the “expected cash flow” is €2,600,000 in year 2 and computed “expected exchange rate” for year 2 is $1.37339233675/€.
Hence, the dollar cash flow in year 2 is $3,570,820.074.
Computation of the dollar cash flows in the year 3:
It is given that the “expected cash flow” is €3,500,000 in year 3, subsidiary is sold for €8,900,000 of year 3, and computed “expected exchange rate” for year 3 is $1.3801378786/€.
Hence, the dollar cash flow in year 3 is $17,113,709.69.
The dollar cash flows for the subsequent years:
Year | Dollar cash flows |
0 | –$16,320,000 |
1 | $2,460,023.575 |
2 | $3,570,820.074 |
3 | $17,113,709.69 |
Computation of the net present value:
Hence, the NPV is $514,147.1888.
Want to see more full solutions like this?
Chapter 21 Solutions
Fundamentals of Corporate Finance Standard Edition
- Dr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forwardDr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forwardDr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forward
- Dr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forwardAn investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the DRIP. a. If neither the dividend nor the price changes, how many shares will the investor have at the end of 10 years? How much will the position in the stock be worth? Answer: 5.000 shares purchased in year 1 5.250 shares purchased in year 2 6.078 shares purchased in year 5 62.889 total shares purchased b. If the price of the stock rises by 6 percent annually but the dividend remains at $2 a share, how many shares are purchased each year for the next 10 years? How much is the total position worth at the end of 10 years? Answer: 4.717 shares purchased in year 1 4.592 shares in year 3 3.898 shares in year 10 Value of position: $10,280 c. If the price of the stock rises by 6 percent annually but the dividend rises by only 3 percent annually, how many shares are purchased each year for the next 10 years? How much is the total position worth at the…arrow_forwardDr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000 Calculate the IRR for the two proposed Projectsarrow_forward
- Your sibling want to go on a holiday in 7 years. The cost of a similar holiday today is R70,000 and the cost of the holiday increases by 5% per annum.If he/she can earn 11% per annum on a savings account, how much must he/she save per month as from today to have the money ready in 7 years time? Note: savings will be at the beginning of each month.arrow_forwardHow does corporate governance of a not-for-profit business vary from corporate governance of a traditional for profit business?Include references.arrow_forwardGiven the information below for HooYah! Corporation, compute the expected share price at the end of 2026 using price ratio analysis. Assume that the histor (arithmetic) average growth rates will remain the same for 2026. end of Year 2020 2021 2022 2023 2024 2025 Price $ 27.00 $ 63.50 $ 135.00 $ 212.00 $ 102.00 $ 32.50 EPS -7.00 -6.29 -2.30 -0.57 0.05 0.06 CFPS -18.00 -15.50 -3.30 -0.05 0.63 0.08 SPS 24.00 32.50 27.60 31.10 34.60 40.95 What is the expected share price at the end of 2026, using PE ratio? $110.45 $100.45 $120.45 $90.45 22 Multiple Choice Given the information below for HooYah! Corporation, compute the expected share price at the end of 2026 using price ratio analysis. Assume that the histor (arithmetic) average growth rates will remain the same for 2026. end of Year 2020 2021 2022 2023 2024 2025 Price $ 27.00 $ 63.50 $ 135.00 $ 212.00 $ 102.00 $ 32.50 EPS -7.00 -6.29 -2.30 -0.57 0.05 0.06 CFPS -18.00 -15.50 -3.30 -0.05 0.63 0.08 SPS 24.00 32.50 27.60 31.10 34.60 40.95…arrow_forward
- What is finance subject? how can this usefull with corporate finance?arrow_forwardwhat is corporate finance ? how this is added with finance. no aiarrow_forward(Annual percentage yield) Compute the cost of the following trade credit terms using the compounding formula, or effective annual rate. Note: Assume a 30-day month and 360-day year. a. 3/5, net 30 b. 3/15, net 45 c. 4/10, net 75 d. 3/15, net 45 ... a. When payment is made on the net due date, the APR of the credit terms of 3/5, net 30 is decimal places.) %. (Round to twoarrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education





