-Refer to Exhibit T13.1. Suppose that beginning in year 1, there is a 10% chance each year the host government will seize the project's assets. If the assets are not seized, you expect to receive the cash flows as stated above. If the assets are seized in a particular year, you expect to receive no repatriated funds thereafter. Assuming international parity conditions hold, S0£/€ = £2/€, i^€ = 5%, and i^£ = 7%, what is the NPV in pounds?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV in pounds is £42,431.49. This is calculated by first converting the cash flows to euros using the spot exchange rate of £2/€. The cash flows in euros are then discounted back to the present using the euro interest rate of 5%. The present value of the cash flows is then converted back to pounds using the spot exchange rate.