Question

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Question 5 0 / 1 point Your company is looking at a new project in Mexico. The project will cost 900,000 pesos. The cash flows are expected to be 400,000 pesos per year for 5 years. The current spot exchange rate is 19.07 pesos per dollar. The risk-free rate in the US is 4%, and the risk-free rate in Mexico 8%. The dollar required return is 10%. What is the net present value of this investment in U.S. Dollars? DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ROUND ANSWER TO THE NEAREST CENT Answer: 34,632.2 X (24,129)

Answer 1

Answer:-

Given the required return = 10%
The initial investment = 900000 pesos

The expected cash flows = 400000 pesos / year for 5 years

The NPV = - 900000 + 400000 / 1.1 + 400000 / 1.1² + 400000 / 1.1³ + 400000 / 1.1⁴ + 400000 / 1.1⁵

NPV = -900000 + 3636336.36 + 330578.51 + 300525.92 + 273205.38 + 248368.53
NPV = -900000 + 1516314.7
NPV = 616314.7 pesos

Given spot rate = pesos 19.07 / Dollar
RFR US = 4 %
RFR Mexico = 8 %
Forward rate = pesos 19.07 / $ x (1.08 / 1.04) [ Forward rate = Spot rate x ( 1+ (R price currency / R base currency))
Forward rate = pesos 19.8035 / Dollar

Therefore The NPV in Dollars = 616314.7 / 19.08035 = 32295.68 Dollars