You want to invest in a riskless project in Sweden that has an initial cost of SKr428,000 and is expected to produce cash inflows of SKr231,000 a year for 2 years.The project will be worthless after 2 years.The expected inflation rate in Sweden is 1.7 percent while it is 2.6 percent in the United States.A risk-free security is paying 3.8 percent in the United States.Assume the current spot rate is $1 = SKr7.51.What is the net present value of this project in U.S dollars using the foreign currency approach?

Question

Quizplus · Accepted Answer

To calculate the NPV using the foreign currency approach, first find the Swedish risk-free rate using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). The U.S. real rate is approximately 1.2% (3.8% - 2.6%). The Swedish nominal rate is approximately 2.9% (1.2% + 1.7%). Discount the cash flows of SKr231,000 for 2 years at 2.9% to get the present value in SKr. Convert this to USD using the spot rate of $1 = SKr7.51. Subtract the initial investment converted to USD to find the NPV.

You Want to Invest in a Riskless Project in Sweden