Question

You want to invest in a project in LaLaLand. The project has an initial cost of LLL 757,000 and is expected to produce cash inflows of LLL 396,000 a year for 3 years. The project will be worthless after that. The expected inflation rate in LaLaLand is 4% while it is only 3% in the U.S. The applicable interest rate for a project like this in LaLaLand is 12%. The current spot exchange rate is LLL1 = $2.3456.

What is the Net Present Value of this project in Lalaland's currency.(i.e., in "LLL")?

Answer 1

194,112.8

Step-by-step explanation:

The computation of Net Present Value is shown below:-

Net Present Value = Present value of cash inflows - Present value of Cash outflows

= -757,000 + 396,000 × PVAF (12%, 3 years)

= -757,000 + 396,000 × 2.4018

= -757,000 + 951,112.8

= LLC 194,112.8

= 194,112.8

Therefore for computing the net present value we simply applied the above formula.