LaKonishok Equipment has an investment opportunity in Europe. The project costs
ID: 2743810 • Letter: L
Question
LaKonishok Equipment has an investment opportunity in Europe. The project costs 15, 160,000 an, . expected to produce cash flows of 3, 750,000 in Year 1, 4, 750,000 in Year 2. and 5, 150,000 in Year 3. The current spot exchange rate is $.82/; and the current risk-free rate in the United States is 2 percent, compared to that in euro land of 2.6 percent. The appropriate discount rate for the project is estimated to be 8 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated 9, 650.000. What is the NPV of the project in U.S. dollars? (Do not round Intermediate calculations and round your final answer to 2 decimal Places (e.g., 32.16.). Enter your answer In dollars, not In millions (e.g., 1, 234, 567).)Explanation / Answer
Year1:
Spot Exchange rate €=$0.82
Forward exchange rate for 1 year
€*1.026=$0.82*1.02
€=$0.82*1.02/1.026=$0.8152
Year2:
orward exchange rate for 2nd year
€*1.026^2=$0.82*1.02^2
€=$0.82*(1.02^2)/1.026)^2=$0.82*1.0404/1.052676=$0.8104
Year3:
orward exchange rate for 3rd year
€*1.026^3=$0.82*1.02^3
€=$0.82*(1.02^3)/1.026)^3=$0.82*1.061208/1.080046=$0.8057
NPV of the Project in U.S Dollars:
Year Cash flow in €-A Exchange rate-B Cash flow in $-C(A*B) Pv@8%-D NPV*D*C 0 -15,150,000 0.82 -12,423,000 1.0000 -12,423,000 1 3,750,000 0.8152 3,057,000 0.9259 2,830,556 2 4,750,000 0.8104 3,849,400 0.8573 3,300,240 3 5,150,000 0.8057 4,149,355 0.7938 3,293,892 3 9,650,000 0.8057 7,775,005 0.7938 6,172,050 3,173,737Related Questions
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