Question

Petrus Company 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 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. 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 $.55 and $.60, respectively

Answer 1

$(94,179)

Step-by-step explanation:

Particulars Year 0 Year 1 Year 2

Cash flows ($1,500,000) A$1,000,000 A$2,000,000

DCF 14% 1 0.8772 0.7695

Present Values 1500,000 A$877,200 A$ 1,538,935

Conversion 1 0.55 0.60

P V in US$ (1,500,000) 482,460 923,361

Therefore Net Present Value = 482,460 +923,361 - 1,500,000 = $(94,179)