Petrus Co. 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 A$2,000,000 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 percent. 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

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Business

Simeon Lee

14 September, 22:04

Petrus Co. 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 A$2,000,000 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 percent. 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

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Miracle Pittman · Answer 1

-$94,182.83

Explanation:

Total investment: $1,500,000

Discount rate: 14%

Cash inflow year 1 = A$ 1,000,000 = 1,000,000 * $.55 = $550,000

Cash inflow year 2 = A$ 2,000,000 = 2,000,000 * $.60 = $1,200,000

Net present value (NPV) = Cash inflow year 1 / (1 + discount rate) ^ 1 + Cash inflow year 2 / (1 + discount rate) ^2 - Investment

= $550,000 / (1+14%) ^1+$1,200,000 / (1+14%) ^2 - $1,500,000

= - $94,182.83