Seven Company has a unique opportunity to invest in a two-year project in Australia. The project...
Seven Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,200,000 Australian dollars (A$) in the first year and 2,100,000 Australian dollars in the second. Seven would have to invest $1,500,000 in the project. Seven has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?
Homework Answers
Expected Project Cash Flows: A$ 1.2 million in Year 1 and A$ 2.1 million in Year 2, Discount Rate = 14 %, Spot Rate in Year 1 = $ 0.55 / A$ and $ 0.6 / A $ in Year 2
Initial Investment = $ 1.5 million
Project NPV = [1.2 x 0.55] / (1.14) + [2.1 x 0.6] / (1.14)^(2) - 1.5 = $ 0.04848 million or $ 48476.45
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