You are considering a project in Poland which has an initial cost of 275,000PLN.

Question

You are considering a project in Poland which has an initial cost of 275,000PLN. The project is expected to return a one-time payment of 390,000PLN four years from now. The risk-free rate of return is 4.5 percent in the U.S. and 3 percent in Poland. The inflation rate is 4 percent in the U.S. and 2 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment of 390,000PLN be worth in U.S. dollars four years from now?
A. $149,568
B. $180,560
C. $987,251
D. $1,016,926
E. $1,304,357<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Please provide calculations for answer

Explanation / Answer

Current rate=2.77PLN/USD

Using PPP

Expected future price/Current rate=(1+Risk free rate in US)/(1+Risk free rate in Poland)*(1+Inflation rate in Poland)

Expected price/2.77=(1.045/1.03)^4*[(1.02)^4]

Or expected price=3.1769

Therefore value=3.1769*390000

=E. $1,304,357

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