Petrus Company has a unique opportunity to invest in a two-year project in Austr

Question

Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest U.S.$ 1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $0.55 and $0.60, respectively? Assume the current spot rate to be $0.50.

Explanation / Answer

NPV= B. -$94,183 .55x1000000/1.14+(.6x2000000/1.14^2)-1500000= 94182.825

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