Question

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86 million and is expected to produce cash inflows of SKr1.76 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is SKr7.7274. What is the net present value of this project in Swedish krona if the international Fisher effect applies

Answer 1

Skr 978,177

Step-by-step explanation:

The computation of the net present value is given below:

Given that

Inflation in USA = 2.80%

The Nominal rate in USA = 4.10%

As we know that

Real rate = Nominal rate - inflation

Real rate = 4.10% - 2.80%

= 1.3%

Now nominal rate in Sweden should be

= Real rate + Inflation

= 1.3% + 3.20%

= 4.50%

Net present value = initial outlay + Present value (Cash Flow)

NPV(in SKr million) = -3.86 + 1.76 ÷ (1+0.045) + 1.76 ÷ (1+0.045)^2 + 1.76 ÷ (1+0.045)^3

= -3.86 + 4.838177

= 0.978177 million

= Skr 978,177