Question

Corpus Co. 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$) in the first year and A$ 2,000,000 in the second. Corpus would initially have to invest $1,500,000 in the project. Corpus has determined that the cost of capital for similar projects is 15%. Interest rate in Australia is 5% per year. The project has no salvage value.

a. 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 $.75 and $.80 respectively

b. if the funds are blocked and that the parent company will only be able to remit them back to the US in two years, how does this affect the NPV of the project

Answer 1