Your company is considering an investment project in Canada. The project has an initial cost of C...
Your company is considering an investment project in Canada. The project has an initial cost of CAD529,000 and is expected to produce cash inflows of CAD182,000 a year for five years. The project will be worthless after three years. The expected inflation rate in Canada is 2.3 percent while it is 2 percent in the U.S. The applicable interest rate in Canada is 5.72 percent. The current spot rate is CAD1 = $.7582. What is the net present value of this project in U.S. dollars using the foreign currency approach? $157,613 $168,299 $175,622 $184,641 $193,176
Homework Answers
Net present value = present value of cash inflows – present value of cash outflows
= 182,000*PVAF(5.72%, 5 years)- 529,000
= 182,000*4.2446448 – 529,000
= CAD243,525.358925
In foreign currency approach, the NPV amount will be converted at the spot rate
Hence, NPV in $ = 243,525.358925*0.7582
= $184,641
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