You want to invest in a project in Canada.The project has an initial cost of C$1.2 million and is expected to produce cash inﬂows of C$600,000 a year for 3 years.The project will be worthless
After the ﬁrst 3 years.The expected inﬂation rate in Canada is 4 percent while it is only 3 percent in
The U.S.The applicable interest rate in Canada is 8 percent.The current spot rate is C$1 = $.69.
What is the net present value of this project in Canadian dollars using the foreign currency
Approach?

Question

Quizplus · Accepted Answer

C$346,258To calculate the net present value (NPV) of the project in Canadian dollars using the foreign currency approach, we first need to calculate the present value (PV) of the cash inflows and then subtract the initial cost. The cash inflows are C$600,000 for each of the three years. Given the applicable interest rate in Canada is 8%, we use this rate to discount the future cash inflows to their present values.The formula for the present value of an annuity (since the cash inflows are equal each year) is: PV = C * [(1 - (1 + r)^-n) / r], where C is the annual cash inflow, r is the discount rate, and n is the number of periods.Plugging in the values: PV = C$600,000 * [(1 - (1 + 0.08)^-3) / 0.08] = C$600,000 * [1 - (1.08)^-3] / 0.08 = C$600,000 * [1 - 0.793832] / 0.08 = C$600,000 * 0.206168 / 0.08 = C$600,000 * 2.5771 = C$1,546,258Then, we subtract the initial cost of C$1.2 million from the total present value of the cash inflows: NPV = C$1,546,258 - C$1,200,000 = C$346,258.

You Want to Invest in a Project in Canada