Lakonishok Equipment has an investment opportunity in Europe. The project costs
ID: 2641040 • Letter: L
Question
Lakonishok Equipment has an investment opportunity in Europe. The project costs 12 million and is expected to produce cash flows of 1.8 million in Year 1, 2.6 million in Year 2, and 3.5 million in Year 3. The current spot exchange rate is $1.36/; the current risk-free rate in the United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 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 8.9 million. What is the NPV of the project? (Enter your answer in thousands of dollars, not in millions. (e.g., 1,234,567). Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer:
Net Present value= {( Cash flow for year 1 ) / (1+r)^1}+{( Cash flow for year 2 ) / (1+r)^2}+{( Cash flow for year 3 + Salvage Value) / (1+r)^3} - Initial Investment,
Here , r = Discount rate, i. e 13% (0.13)
Hence, Net Present Value = {1.8 million / (1+0.13)^1} + {2.6 million / (1+0.13)^2} + {3.5 million+8.9 million / (1+0.13)^3} - 12 millions
Therefore, Net Present Value =
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