You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 6% and the current competitive exchange rate is €0.78 to $1.00.What is the NPV of this project? Would you take the project?

Question

Quizplus · Accepted Answer

First, we need to convert the cash flow from euros to dollars:
208,650 euros * $0.78/euro = $162,717
Next, we need to find the present value of this cash flow using the risk-free rate in Germany:
PV = $162,717 / (1 + 0.06) = $153,470.75
Finally, we need to subtract the initial investment from the present value to find the NPV:
NPV = $153,470.75 - $250,000 = -$96,529.25
Since the NPV is positive, the project is profitable and we should take the project. Therefore, the best choice is C.

You Have an Investment Opportunity in Germany That Requires an Investment