Question

Lakonishok Equipment has an investment opportunity in Europe. The project costs €15 million and is expected...

Lakonishok Equipment has an investment opportunity in Europe. The project costs €15 million and is expected to produce cash flows of €1.7 million in year 1, €3.4 million in year 2, and €2.7 million in year 3. The current spot exchange rate is $1.15/€; the current risk-free rate in the United States is 4.9 percent, compared to that in Europe of 4.8 percent. The appropriate discount rate for the project is estimated to be 17 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €8.2 million. What is the NPV of the project?

Homework Answers

Answer #1

Answer :

To calculate the NPV, first we need to compute the interest rate parity forward rates:

Year Formula Calculation Forward rate
1 Spot rate * ( 1 + Hi ) / ( 1 + Fi ) 1.15 * ( 1.049 ) / ( 1.048 ) 1.1511
2 Spot rate * ( 1 + Hi )^2 / ( 1 + Fi )^2 1.15 * ( 1.049 )^2 / ( 1.048 )^2 1.1522
3 Spot rate * ( 1 + Hi )^3 / ( 1 + Fi )^3 1.15 * ( 1.049 )^3 / ( 1.048 )^3 1.1533

NPV = PV of cash inflows - PV of cash outflows

Year Cash flow in Euro Exchange rate Cash flow in USD PVF @17% Discounting CF
0 € (15,000,000 ) 1.1500 $ ( 17,250,000 ) 1.0000 $ ( 17,250,000 )
1 € 1,700,000 1.1511 $ 1,956,870 0.8547 $ 1,672,536.79
2 € 3,400,000 1.1522 $ 3,917,480 0.7305 $ 2,861,719.14
3 € 2,700,000 1.1533 $ 3,113,910 0.6244 $ 1,944,325.40
3 € 8,200,000 1.1533 $ 9,457,060 0.6244 $ 5,904,988.26
NPV => - $ 4,866,430.41

NPV of the project is - $ 4,866,430.41

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €3.3 million in year 1, €3.7 million in year 2, and €3.9 million in year 3. The current spot exchange rate is $1.25/€; the current risk-free rate in the United States is 5.2 percent, compared to that in Europe of 4.3 percent. The appropriate discount rate for the project is estimated to be 9 percent, the U.S. cost of...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €10.5 million and is expected...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €10.5 million and is expected to produce cash flows of €1.7 million in Year 1, €2.4 million in Year 2, and €3.3 million in Year 3. The current spot exchange rate is €.94/$ and the current risk-free rate in the United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €13 million and is expected...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €13 million and is expected to produce cash flows of €2.1 million in Year 1, €3.1 million in Year 2, and €3.6 million in Year 3. The current spot exchange rate is $1.40 / €; and the current risk-free rate in the United States is 2.6 percent, compared to that in Europe of 2.2 percent. The appropriate discount rate for the project is estimated to be 13 percent, the...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.3 million in Year 1, €2.9 million in Year 2, and €3.8 million in Year 3. The current spot exchange rate is $1.38 / €; and the current risk-free rate in the United States is 3.2 percent, compared to that in Europe of 2.3 percent. The appropriate discount rate for the project is estimated to be 11 percent, the...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected...
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.3 million in Year 1, €2.9 million in Year 2, and €3.8 million in Year 3. The current spot exchange rate is $1.38 / €; and the current risk-free rate in the United States is 3.2 percent, compared to that in Europe of 2.3 percent. The appropriate discount rate for the project is estimated to be 11 percent, the...
Capital Budgeting Lakonishok Equipment has an investment opportunity in Europe. The project costs 19 million Euro...
Capital Budgeting Lakonishok Equipment has an investment opportunity in Europe. The project costs 19 million Euro an is expected to produce cash of 3.6 million euro in year 1, 4.1 million Euro in year 2, and 5.1 million Euro in year 3. The current spot exchange rate is $1.19/Euro and the current risk-free rate in the United States is 3.1 percent, compared to that in Europe of 2.9 percent. The appropriate discount rate for the project is estimated to be...
You are analyzing a project with an initial cost of £50,000. The project is expected to...
You are analyzing a project with an initial cost of £50,000. The project is expected to return £12,000 the first year, £36,000 the second year, and £40,000 the third and final year. There is no salvage value. Assume the current spot rate is £.6346. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 3.4 percent while it is 4.1 percent in the U.K. Assume that uncovered interest rate...
Suppose that a U.S. FI has the following assets and liabilities: Assets Liabilities $400 million U.S....
Suppose that a U.S. FI has the following assets and liabilities: Assets Liabilities $400 million U.S. loans  (one year) in dollars $500 million U.S. CDs  (one year) in dollars $100 million equivalent German  loans (one year) (loans made in euros) The promised one-year U.S. CD rate is 2 percent, to be paid in dollars at the end of the year; one-year, default risk–free loans in the United States are yielding 4 percent; and default risk–free one-year loans are yielding 5...
Fitzgerald Industries has a new project available that requires an initial investment of $5.2 million. The...
Fitzgerald Industries has a new project available that requires an initial investment of $5.2 million. The project will provide unlevered cash flows of $839,000 per year for the next 20 years. The company will finance the project with a debt-value ratio of .4. The company’s bonds have a YTM of 6 percent. The companies with operations comparable to this project have unlevered betas of 1.19, 1.12, 1.34, and 1.29. The risk-free rate is 3.4 percent and the market risk premium...
A firm is evaluating a four-year project that requires an investment today of $2.6 million. In...
A firm is evaluating a four-year project that requires an investment today of $2.6 million. In addition, the project will require a one-time injection of working capital of $222,000 today that will be recovered at project end. The project is estimated to provide operating cash flows of $615,000 each year for the four years. The firm’s discount rate is 8.5%. What is the NPV of the project?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT