Question

You are analyzing a project with an initial cost of £50,000. The project is expected to return £10,000 the first year, £35,000 the second year and £40,000 the third and final year. The current spot rate is £0.5086. The nominal return relevant to the project is 11 percent in the U.S. The nominal risk-free rate in the U.S. is three percent while it is five percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

please show how to calculate the NPV

Answer 1

for computing NPV ,we use foreign Cunnency Approach, for which we need project Required Rate in UK Jux = (1+ Required Rate in us) x (It Risk free in UK) - (1+ Risk free in us) 1:1315 -1 = 13.15% 1.1 6.052 -1 = (1103)] Chinese)" Years Cash flows -$50,000 +$ 10,oo +$35,000 + & Go, Goo + 0.883783 0.781072 0.690297 Discounted CF. - 50cco +$ 8,837.83 + £ 27,337-52 +$ 27,611.88 + NPV of 13,787.23 NPV ($) = NAV(£)/Exchange SPOT Rate = £ 13.787.230.5086 = $ 13,787.23 = $ 27,108 · 20 0-5086

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