You are analyzing a project with an initial cost of £48,000.The project is expected to return £11,000 the first year,£36,000 the second year and £38,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal return relevant to the project is 12 percent in the U.S.The nominal risk-free rate in the U.S.is 4 percent while it is 5 percent in the U.K.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?

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Quizplus · Accepted Answer

E(S₁) = 0.6211 × [1 + (0.05 - 0.04)]¹ = 0.627311E(S₂) = 0.6211 × [1 + (0.05 - 0.04)]² = 0.63358411E(S₃) = 0.6211 × [1 + (0.05 - 0.04)]³ = 0.639919951CF₀ = -£48,000 × ($1/£0.6211) = -$77,282.24CF₁ = £11,000 × ($1/£0.627311) = $17,535.16CF₂ = £36,000 × ($1/£0.63358411) = $56,819.61CF₃ = £38,000 × ($1/£0.639919951) = $59,382.43NPV = -$77,282.24 + ($17,535.16/1.12¹) + ($56,819.61/1.12²) + ($59,382.43/1.12³) = -$77,282.24 + $15,656.39 + $45,296.25 + $42,267.24 = $25,938

You Are Analyzing a Project with an Initial Cost of £48,000.The