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 SKrl.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 $1 = SKr7.7274. What is the net present value of this project in Swedish krona if the International Fisher effect applies?

a. SKr1, 087, 561
b. SKr958, 029
c. SKr701, 458
d. SKr823, 333
e. SKr978, 177

Answer 1

The net present value of this project in Swedish krona if the International Fisher effect applies is:

e. SKr978, 177

Step-by-step explanation:

a) Data and Calculations:

Initial project cost = SKr 3.86 million

Annual cash inflows = SKr 1.76 million

Project duration = 3 years

Expected inflation rate in Sweden = 3.2%

Expected inflation rate in the U.S. = 2.8%

Risk-free security interest rate in the U.S. = 4.1%

Interest rate in Sweden = 4.5% (4.1% + 3.2% - 2.8%)

Current spot rate = $1 to SKr 7.7274

The present value of the cash inflows = SKr4,838,177.26

The present value of initial outflows = SKr3,860,000.00

Net present value of the project = SKr978,177.26

From an online financial calculator, the present value of the cash inflows:

N (# of periods) 3

I/Y (Interest per year) 4.5

PMT (Periodic Payment) 1760000

FV (Future Value) 0

Results:

PV = SKr4,838,177.26

Sum of all periodic payments = SKr5,280,000.00

Total Interest = SKr441,822.74