Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by converting the future cash flows from Australian dollars to US dollars using the forecasted spot rates, discounting them at the cost of capital, and subtracting the initial investment. The NPV calculation is:  Year 1: 1,000,000 A$ * $0.55 = $550,000  Year 2: 2,000,000 A$ * $0.60 = $1,200,000  NPV = ($550,000 / (1 + 0.14)^1) + ($1,200,000 / (1 + 0.14)^2) - $1,500,000 = -$94,183.

Petrus Company Has a Unique Opportunity to Invest in a Two-Year