Question

Lakonishok Equipment has an investment opportunity in Europe. The project costs €15 million and is expected to produce cash flows of €2.9 million in Year 1, €3.5 million in Year 2, and €4.0 million in Year 3. The current spot exchange rate is $1.44/€; and the current risk-free rate in the United States is 3.0 percent, compared to that in Europe of 2.5 percent. The appropriate discount rate for the project is estimated to be 12 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 €9.9 million.

  

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Enter your answer in dollars, not in millions, e.g., 1,234,567.)

  

NPV

$

Answer 1

Quote currency	USD
Base Currency	EUR
Exchange rate	1.44
Quote currency risk free/inflation rate	3%
Base currency risk free/inflation rate	2.5%
Project
N=	3
Discount rate	12.000%
Year	0	1	2	3
Cash flow stream (EUR)	-15.000	2.900	3.500	13.900
Exchange rate	1.440	1.447	1.454	1.461
Cash flow stream (USD)	-21.600	4.196	5.089	20.310
Discounting factor	1.000	1.120	1.254	1.405
Discounted cash flows project	-21.600	3.747	4.057	14.457
NPV = Sum of discounted cash flows
NPV Project =	660415.66
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Cash flow stream (USD)=	Cash flow stream (EUR)*Exchange rate
Exchange rate=	Spot rate*((1+USD rate)/(1+EUR rate))^corresponding period in years