You are considering a project in Poland which has an initial cost of 375,000PLN. The project is expected to return a one-time payment of 500,000PLN 4 years from now. The risk-free rate of
Return is 4 percent in Canada and 4.5 percent in Poland. Currently, you can buy 323PLN for $100.
How much will the payment 4 years from now be worth in Canadian dollars?

Question

Quizplus · Accepted Answer

To calculate the future value of the payment in Polish Zloty, we need to use the formula:

FV = PV x (1 + r)^n

Where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years.

PV = 500,000 PLN 
r = 4.5% 
n = 4

FV = 500,000 x (1 + 0.045)^4 = 626,804.64 PLN

To convert this amount to Canadian dollars, we need to divide by the exchange rate:

626,804.64 PLN / 323 PLN per $100 = $1938.70 CAD

To find the present value of this future payment, we need to discount it back to the present using the risk-free rate of return. We can use the formula:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years.

PV = 1938.70 / (1 + 0.04)^4 = $1517.41

Therefore, the payment 4 years from now will be worth $1517.41 CAD in present value terms.

Since the initial cost of the project is 375,000 PLN, we need to convert this to Canadian dollars:

375,000 PLN / 323 PLN per $100 = $1155.52 CAD

The net present value of the project is:

NPV = PV of future payment - Initial cost 
NPV = $1517.41 - $1155.52 = $361.89

Since the NPV is positive, we should undertake the project.

Therefore, the best choice is: 
Answer: B

You Are Considering a Project in Poland Which Has an Initial