Taiwan Semiconductor (TSM) is considering a 2-year project in the U.S. The proje
ID: 2736682 • Letter: T
Question
Taiwan Semiconductor (TSM) is considering a 2-year project in the U.S. The project's expected dollar cash flows consist of an initial investment of $100,000 with cash flows of $70,000 in year 1 and $60,000 in year 2. The risk-adjusted cost of capital for the project is 20%. The current exchange rate is NT$30=$1. Risk-free interest rates in the U.S. and Taiwan are:
U.S.
1-year: 4.0%
2-year: 7%
Taiwan:
1-year: 3%
2-year: 5%
What is the NPV of the project?
Note: During the calculations, the rounding of the numbers may impact the final answer. So select the closest answer.
Select one:
a. $12,532.86
b. -$52,900.77
c. -$63,166.67
d. $45,655.09
e. $23,090.74
Explanation / Answer
Answer (B) - $52900.77 (Negative cashflow)
1.Calculation of NPV of the project :
using interest rate parity calculation of forward rate for 1 year
1.03/1.04 = F/30
One year forward rate = 29.71 taiwan dollars/$
2nd year forwardrate 1.05/1.07 = F/29.71
2 year Forward rate = 29.15 taiwan dollar /S
Npv of the project = - 30,00,000+1733014.01+1214505.60
= $52900.77 ( approximately)
Particulars 0 year 1st year 2nd year Cash flows ($1,00,000) $70000 $60000 Discount factor@20% 1 0.8333 0.6944 Present value ($100000) $58331 $41664 Exchange rate $30 $29.71 29.15 Present value in taiwan dollars ($30,00,000) $1733014.01 $1214505.6Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.