Question

An American firm is considering a new project in the country of Gleeblaistan. This new project will produce the following cash flows measured in BLAs, the currency of Gleeblaistan, which are expected to be repatriated to the parent company in the U.S.

Year	Cash Flow (in millions of BLA)
0	-20
1	8
2	8
3	7
4	5

The current spot rate is 0.90BLA/$ and the risk free rates in the two countries are shown below:

	1 year	2 years	3 years	4 years
U. S. interest rate	3.5	3.5	3.6	3.7
Gleeblaistan interest rate	6.9	6.7	6.4	6.2

Assume that the American firm is borrowing in the U.S. at rate of 8%. What is the project’s NPV in U.S. dollars?

Answer 1

Current rate		=	0.9	BLA/$
	Forex rates calculation				(d)=Ex rate in last year*{1+(b)}/{1+©}
		(a)	(b)	(.c)
		Year	Interest rate (US)	Interest rate (gleeblaistan)	Exchange rate (BLA/$)
		1	0.035	0.069	0.9296
		2	0.035	0.067	0.9583
		3	0.036	0.064	0.9842
		4	0.037	0.062	1.0079
	Calculation of PV of NPV
		Year	Cashflow (BAL)	Exchange rate	Cashflow (USD)	PVF @ 8%	Discounted CF
		0	-20	0.9	-22.2222	1	-22.2222
		1	8	0.9296	8.6062	$0.93	7.9687
		2	8	0.9583	8.3481	$0.86	7.1571
		3	7	0.9842	7.1123	$0.79	5.6460
		4	5	1.0079	4.9606	$0.74	3.6462
						Total	2.1958
		NPV	=	Sum of all discounted cashflows
			=	$2.1958 miliions
		Note
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