Question 42 The firm is building a plant in Brazil to produce hats to sell in th

Question

Question 42

The firm is building a plant in Brazil to produce hats to sell in that country. The plant is expected to produce a cash flow (in Brazilian Real) as indicated below. The U.S. risk free rate is 8%. U.S. inflation is forecasted at 5% annually and the Brazilian rate at 6.5% annually. The current spot rate is 2.0 Real per dollar. Assume an appropriate discount rate is 15% (after conversion of cashflows to U.S. $). The expected spot rates per BRL for years 1 and 2 are $0.4930 and $0.4861, respectively. The appropriate discount rate is 15%. What is the NPV of the investment if the firm would need to invest $300 in the project at time zero?

Time

0

1

2

Brazilian Real (R$)

     500

500

Time

0

1

2

Brazilian Real (R$)

     500

500

Explanation / Answer

Answer:

Discount rate 15% Time Cash Flow ($) 0 -300 1 246.5 500*0.4930 2 243.05 500*0.4861 NPV $98.13

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