Question

The spot exchange rate is ¥125 = $1. The U.S. discount rate is 10 percent; inflation...

The spot exchange rate is ¥125 = $1. The U.S. discount rate is 10 percent; inflation over the next three years is 3 percent per year in the U.S. and 2 percent per year in Japan. Calculate the dollar NPV of this project.

Year 0 = -1,000,000 yen Year 1= 50,000 yen year 2 = 500,000 yen Year 3= 500,000 yen

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Answer #1

Forward exchange rate = SPot rate*(1+Inflation rate Japan)/(1+Inflation rate US)

NPV = prsent value of cash inflows - present value of cash outflows

Year 0 Year 1 Year 2 Year 3
Cash flows in Yen -1000000 50000 500000 500000
Exchange rate 125 123.7864078 122.584598 121.3944563
Cash flows in USD -8000 403.9215686 4078.81584 4118.804231
PVF 1 0.909090909 0.826446281 0.751314801
PV of cash flows -8000 367.201426 3370.922182 3094.518581
NPV -1167.357812

Hence, the answer is -$1,167.36

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