An Australian firm is evaluating a proposal to build a new plant in the U.S.The expected cash flows in $US (in millions)are as follows: Year 0,-100; Year 1,40; Year 2,50; Year 3,65.The discount rate in $A is 10%,while the discount rate in $US is 12% and the spot rate is $US0.85/$A.
Calculate the NPV in $A:

Question

Quizplus · Accepted Answer

1. Convert the cash flows from $US to $A:
Year 0: -100/0.85 = -117.65
Year 1: 40/0.85 = 47.06
Year 2: 50/0.85^2 = 53.69
Year 3: 65/0.85^3 = 63.46

2. Calculate the NPV in $A using the discount rate of 10%:
NPV = -117.65 + (47.06/(1+0.1)^1) + (53.69/(1+0.1)^2) + (63.46/(1+0.1)^3)
NPV = 25.69

Therefore, the best choice is A as it is the only positive NPV option.

An Australian Firm Is Evaluating a Proposal to Build a New