You want to invest in a riskless project in Sweden The project has an initial

You want to invest in a riskless project in sweden

This preview shows page 61 - 65 out of 65 pages.

88. You want to invest in a riskless project in Sweden. The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Sweden is 2 percent while it is 5 percent in the U.S. A risk-free security is paying 6 percent in the U.S. The current spot rate is $1 = SKr7.55. What is the net present value of this project in Swedish krona using the foreign currency approach? Assume that the international Fisher effect applies. A. SKr185,607B.SKr191,175C. SKr196,910D. SKr197,867E. SKr202,818.06 - .05 = RFC- .02; RFC= .03; NPV = -SKr2.1m + (SKr810,000 ÷1.031) + (SKr810,000 ÷1.032) + (SKr810,000 ÷1.033) = SKr191,175Difficulty level: ChallengeTopic: FOREIGN CURRENCY APPROACHType: PROBLEMS31-61
Background image
Chapter 31 - International Corporate Finance 89. You are analyzing a very low-risk project with an initial cost of £120,000. The project is expected to return £40,000 the first year, £50,000 the second year and £60,000 the third and final year. The current spot rate is £.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars? E(S1) = .54 ×[1 + (.04 - .03)]1= .545400E(S2) = .54 ×[1 + (.04 - .03)]2= .550854E(S3) = .54 ×[1 + (.04 - .03)]3= .556363CF0= -£120,000 ×($1 ÷£.540000) = -$222,222.22CO1= £40,000 ×($1 ÷£.545400) = $73,340.67CO2= £50,000 ×($1 ÷£.550854) = $90,768.15CO3= £60,000 ×($1 ÷£.556363) = $107,843.26NPV = -$222,222.22 + ($73,340.67 ÷1.031) + ($90,768.15 ÷1.032) + ($107,843.26 ÷1.033) = $33,232Difficulty level: ChallengeTopic: HOME CURRENCY APPROACHType: PROBLEMS31-62
Background image
Chapter 31 - International Corporate Finance 90. You are analyzing a project with an initial cost of £80,000. The project is expected to return £10,000 the first year, £40,000 the second year and £50,000 the third and final year. The current spot rate is £.56. The nominal risk-free return is 5 percent in the U.K. and 7 percent in the U.S. The return relevant to the project is 8 percent in the U.K. and 9.25 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars? E(S1) = .56 ×[1 + (.05 - .07)]1= .548800E(S2) = .56 ×[1 + (.05 - .07)]2= .537824E(S3) = .56 ×[1 + (.05 - .07)]3= .527068CF0= -£80,000 ×($1 ÷£.560000) = -$142,857.14CO1= £10,000 ×($1 ÷£.548800) = $18,221.57CO2= £40,000 ×($1 ÷£.537824) = $74,373.77CO3= £50,000 ×($1 ÷£.527068) = $94,864.42NPV = -$142,857.14 + ($18,221.57 ÷1.09251) + ($74,373.77 ÷1.09252) + ($94,864.42 ÷1.09253) = $8,885.40 = $8,885Difficulty level: ChallengeTopic: HOME CURRENCY APPROACHType: PROBLEMSEssay Questions91. What is triangle arbitrage? Using the U.S. dollar, the Canadian dollar, and the euro, construct an example in which triangle arbitrage exists, and then show how to exploit it.
Background image
92. How well do you think relative purchasing power parity and uncovered interest parity behave? That is, do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?
Background image
Image of page 65

You've reached the end of your free preview.

Want to read all 65 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture