Question

Lakonishok Equipment has an investment opportunity in Europe. The project costs €10 million and is expected to produce cash flows of €1.1 million in Year 1, €1.5 million in Year 2, and €2.6 million in Year 3. The current spot exchange rate is $1.26 / €; and the current risk-free rate in the United States is 1.9 percent, compared to that in Europe of 1.1 percent. The appropriate discount rate for the project is estimated to be 11 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 €8.1 million. Use the exact form of interest rate parity in calculating the expected spot rates.

  

What is the NPV of the project in U.S. dollars? (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

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Home ert Page Layout Formulas Data Review V 義Cut ta copy." Format Painter Add-Ins AutoSum Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Formatting as Table Styles ClearFilter Select Clipboard Font Alignment Cells dting CZ145 cZ DA DB DC DE DF DG DH DI DJ 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 11 | KE CAPM , UTILITY, SH LAKONISHOK RATE OF INTEREST IN US= RATE OF INTEREST IN EUROPE 1.90% 1.10% SPOT RATE 1.26 SPOT RATE AFTER A YEAR SPOT RATE AT END OF YEAR 2 SPOT RATE AT END OF YEAR 31.2800 (1+0.019)/(1 +0.011)- 1.26 (1+0.019)/(1 +0.011)- 1.2700 (1+0.019)/(1 +0.011)- 1.2700 1.2800 1.2901 YEAR CFAT (EURO) SPOT RATE CFAT (S) PV FACTOR PV OF 1196 CFAT (IN $) C -A B (S) D 1.260012600000 1100000 1.27001396967 800 1920074.2 3 10700000 1.2901 13804376 010000000 0.9009 0.8116 0.7312 12600000 1258529.15 1558375.28 10093640.66 500000 1.2 (26000008100000) NPV $ 3,10,545.09 beta bond c future INDEX | INTL CAP BUD PV, FV, ANNUITY DIR right cleanYIELD bond erences: 130 06:56 02-03-2019