QUESTION 16 a) You want to invest in a riskless project in Sweden. The project h

Question

QUESTION 16
a) You want to invest in a riskless project in Sweden. The project has an initial cost of
SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3
years. The project will be worthless after the first 3 years. The expected inflation rate
in Sweden is 2 percent while it is 5 percent in the U.S. A risk-free security is paying 6
percent in the U.S. The current spot rate is $1 = SKr7.55. What is the net present value
of this project in Swedish Krona using the foreign currency approach? Assume that the
international Fisher effect applies (5 marks)

Explanation / Answer

Rfc - 2% = 6% - 5%

Rfc = 1% + 2%

Rfc = 3%

NPV = -2.1 + 0.81/ (1.03) + 0.81/ (1.03)2 + 0.81/ (1.03)3   

NPV = -2.1 + 0.79 + 0.76 + 0.74

NPV = 0.19 million

NPV = 191,175.20

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