Chapter 23, Problem 8CC

Summary Introduction

International integrated market:

An international market can be referred to as an activity of buying or selling goods and services across all the countries of the world. When an investor has the liberty to exchange any amount of any currency at the spot or forward rates and also has the authority to purchase or sell any security in any amount in any country at its current market prices such an international capital market is an integrated market.

Net Present Value:

Net present value (NPV) can be defined as the difference between the present value of cash inflows and the present value of cash outflows. Net present value is used in the process of capital budgeting for analyzing the profitability of a projected investment or project. The formula used to calculate NPV is shown below:

Where,

• is the net cash inflow during the period
• is the initial investment cost.
• is the discount rate.
• is the total time period.

To determine:

When the two methods used to calculate the NPV of a foreign project give the same NPV of the foreign project.