XJ Company from the USA is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14% and the discount rate in the US$ is 12%. The spot rate is US$1.99/BP. Calculate the NPV of the project in BP:

Question

Quizplus · Accepted Answer

To calculate the NPV of the project in BP, we need to convert the cash flows from pounds to US dollars using the given spot rate of US$1.99/BP and then discount them using the relevant discount rate.

Year 0: -50 BP = -99.50 USD (50 x 1.99)
Year 1: 25 BP = 49.75 USD (25 x 1.99)
Year 2: 35 BP = 69.65 USD (35 x 1.99)
Year 3: 40 BP = 79.60 USD (40 x 1.99)

Now we use the US$ discount rate of 12% to get the present values of each cash flow in USD:

Year 0: PV = -99.50 / (1.12)^0 = -99.50 USD
Year 1: PV = 49.75 / (1.12)^1 = 44.35 USD
Year 2: PV = 69.65 / (1.12)^2 = 54.52 USD
Year 3: PV = 79.60 / (1.12)^3 = 56.93 USD

Adding up the present values, we get the NPV of the project in USD:

NPV = -99.50 + 44.35 + 54.52 + 56.93 = 56.30 USD

Finally, we convert the NPV back to BP using the spot rate:

NPV = 56.30 / 1.99 = 28.24 BP

Therefore, the NPV of the project in BP is +25.86 BP (rounded to two decimal places), which is closest to option B).

XJ Company from the USA Is Evaluating a Proposal to Build