You are analyzing a project with an initial cost of $\le$150,000. The project is expected to return $\le$25,000 the first year, $\le$55,000 the second year and $\le$110,000 the third and final year. The current spot rate is $\le$0.5086. The nominal risk-free return is six % in the U.K. and 6.5 % in the U.S. The return relevant to the project is 12 % in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by converting future cash flows into present value using the relevant discount rate and then subtracting the initial investment. The cash flows are converted to U.S. dollars using the spot rate and discounted at the U.S. project rate of 12%. The NPV is negative, indicating the project is not financially viable.

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