Question

(Related to Checkpoint 19.3) (International capital budgeting) An American firm is considering a new project in the country of Geeblaistan. This new project will produce the following cash flows, measured in BLAs, the currency of Geeblaistan, which are expected to be repatriated to the parent company in the United States. In addition, assume the risk-free rate in the United States is 5 percent, and that this project is riskier than most and, as such, the firm has determined that it should require a premium of 13 percent over the risk-free rate. Thus, the appropriate discount rate for this project is 18 percent. In addition, the current spot exchange rate is 0.8294BLA/$, and the 1-year forward exchange rate is 0.9201BLA/$. What is the project's NPV? The project's NPV is $ million. (Round to two decimals places.) i Data Table Year Cash Flow (in millions of BLAs) Print Done

Answer 1

NPV = Discounted cash flow (Net operating cash flow (It discount rates - Pnitial investment + - 11-18) 3 ile -16 (1.18) 1 (1:18)4 NPV = 3.3898 + 4 + 3 + 1 - 16 1.3924 1.6430 1.9387 Nov 3.3848 +1.8727 + 1.8259 + 0.51591-16 NPU - - 7.39574 The above Calwlated New is in BLA and the answer Rewived is in & we need to convert BLA values to s. wrrent spot and 1 year forward exchange ratee have been given cash flows are for multiple years but we discocored those cash plome and get this current values. so we can use current spot exchange rate to Grert BLA into & verlies NPV ing: -7.39579 / 0.8294 -- 491703 millim IBLA is expensive than $1 a8 &1 is ewal to 0.8294 BLA SO & o valle will be higher BLA vale converted to