You want to invest in a riskless project in Sweden. The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Sweden is 2 percent while it is 5 percent in the U.S. A risk-free security is paying 6 percent in the U.S. The current spot rate is $1 = SKr7.55. What is the net present value of this project in Swedish krona using the foreign currency approach? Assume that the international Fisher effect applies.

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First, calculate the expected future spot rates using the international Fisher effect, which suggests that the currency of the country with a lower inflation rate will appreciate against the currency of the country with a higher inflation rate. The formula for the expected spot rate in one year is S1 = S0 * (1 + i domestic) / (1 + i foreign), where S0 is the current spot rate, i domestic is the inflation rate in the domestic country (Sweden), and i foreign is the inflation rate in the foreign country (U.S.).Given that the current spot rate (S0) is $1 = SKr7.55, the inflation rate in Sweden (i domestic) is 2%, and the inflation rate in the U.S. (i foreign) is 5%, we can calculate the expected future spot rates for each of the next three years.Year 1: S1 = 7.55 * (1 + 0.02) / (1 + 0.05) = 7.55 * 1.02 / 1.05 ≈ 7.33Year 2: S2 = 7.33 * (1 + 0.02) / (1 + 0.05) ≈ 7.12Year 3: S3 = 7.12 * (1 + 0.02) / (1 + 0.05) ≈ 6.91Next, convert the annual cash inflows to U.S. dollars using the expected future spot rates and then discount them back to the present value using the U.S. risk-free rate of 6%.Year 1 cash inflow in USD: 810,000 / 7.33 ≈ $110,506Year 2 cash inflow in USD: 810,000 / 7.12 ≈ $113,764Year 3 cash inflow in USD: 810,000 / 6.91 ≈ $117,209Present value of Year 1 cash inflow: $110,506 / (1 + 0.06) ≈ $104,249Present value of Year 2 cash inflow: $113,764 / (1 + 0.06)^2 ≈ $101,189Present value of Year 3 cash inflow: $117,209 / (1 + 0.06)^3 ≈ $98,996Total present value in USD: $104,249 + $101,189 + $98,996 ≈ $304,434Finally, convert the total present value back to Swedish krona using the current spot rate: $304,434 * 7.55 ≈ SKr2,297,434Net present value (NPV) in Swedish krona: SKr2,297,434 - SKr2,100,000 = SKr197,434The correct answer is not listed exactly, but the closest option provided is SKr192,434, which suggests a calculation or rounding error in the explanation process. The correct approach involves adjusting for inflation and discount rates across currencies, but the precise calculations here may have slight inaccuracies in the conversion or discounting steps.

You Want to Invest in a Riskless Project in Sweden