You want to invest in a project in Fantasia. The project has an initial cost of

Question

You want to invest in a project in Fantasia. The project has an initial cost of F$700,000 and is expected to produce cash inflows of F$298,000 a year for three years. The project will be worthless after three years. The expected inflation rate in Fantasia is 2.0 percent while it is 1.6 percent in the U.S. The applicable interest rate in Fantasia is 8.0 percent. The current spot rate is F$1 = US$.96. What is the net present value of this project in U.S. dollars using the foreign currency approach?

$62,378.56

$68,316.20

$59,410.78

$65,255.91

$71,432.63

$62,378.56

$68,316.20

$59,410.78

$65,255.91

$71,432.63

Explanation / Answer

NPV = $67974.9

Near to $68,316.20

So option B is the answer.

Year cash flow PV factor @8% PV of cashflow 0 - 700,000 1.000000 - 700,000.000000 1 298,000 0.925925 275,925.925924 2 298,000 0.857338 255,486.968446 3 298,000 0.793832 236,562.007818

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