Question

You want to invest in a project in Wonderand. The project has an initial cost of W738,000 and is expected to produce cash inflows of W321,000 a year for 4 years. The project will be worthless after that. The expected inflation rate in Wonderland is 2.5% while it is 4.5% in the U.S. The applicable interest rate for a project like this in Wonderland is 13%. The current spot exchange rate is W1 = $2.3456.

Required:
What is the Net Present Value of this project in Wonderland's currency (i.e., in "W")?

Answer 1

Wonderland

Net Present Value of this project in Wonderland's currency is:

= W169,256.05.

Step-by-step explanation:

a) Data and Calculations;

Initial project cost = W738,000

Expected annual cash inflows = W321,000

Project duration = 4 years

Expected inflation rate in Wonderland = 2.5%

Applicable interest rate for the project = 13%

Real interest rate = 15.5% (13% + 2.5%)

Present value of annual cash inflows = W907,256.05

Present value of initial cost outflows = W738,000.00

Net Present Value of this project = W169,256.05

Calculating the PV of the Cash Inflows from an online financial calculator:

N (# of periods) 4

I/Y (Interest per year) 15.5

PMT (Periodic Payment) = W321000

FV (Future Value) 0

Results

PV = W907,256.05

Sum of all periodic payments = W1,284,000.00

Total Interest = W376,743.95