Lakonishok Equipment has an investment opportunity in Europe. The project costs 12 million and is expected...

 

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Lakonishok Equipment has an investment opportunity in Europe. The project costs 12 million and is expected to produce cash flows of 1.9 million in Year 1, 2.3 million in Year 2, and 3.4 million in Year 3. The current spot exchange rate is 1.34/$ and the current risk-free rate in the United States is 2.7 percent, compared to that in Europe of 1.9 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated 8.9 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) Answer is complete but not entirely correct. NPV $ (172,792.69) Lakonishok Equipment has an investment opportunity in Europe. The project costs 12 million and is expected to produce cash flows of 1.9 million in Year 1, 2.3 million in Year 2, and 3.4 million in Year 3. The current spot exchange rate is 1.34/$ and the current risk-free rate in the United States is 2.7 percent, compared to that in Europe of 1.9 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated 8.9 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) Answer is complete but not entirely correct. NPV $ (172,792.69)

Answer rating: 100% (QA)

To calculate the NPV of the project in US dollars we need to estimate the future cash flows in euros ... View the full answer