You want to invest in a project in Canada that has an initial cost of C$812,000 and is expected to produce cash inflows of C$340,000 a year for three years. The project will be worthless after the three years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. Assume the current spot rate is C$1 = $.7874. What is the net present value of this project in Canadian dollars?

Question

Quizplus · Accepted Answer

1. Calculate the future cash inflows in Canadian dollars:
Year 1: C$340,000
Year 2: C$340,000/(1+0.04) = C$326,923
Year 3: C$340,000/(1+0.04)^2 = C$314,136

2. Calculate the present value of the cash inflows:
PV = C$340,000/(1+0.12) + C$326,923/(1+0.12)^2 + C$314,136/(1+0.12)^3
PV = C$777,461

3. Convert the result to U.S. dollars:
C$777,461 * $0.7874/C$1 = $611,786

4. Adjust for inflation:
$611,786/(1+0.03)^3 = $518,150

5. Calculate the net present value in Canadian dollars:
C$518,150 - C$812,000 = C$4,623

Therefore, the best choice is C) C$4,623 as it represents the net present value of the project in Canadian dollars.

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