Question 5 (20 marks)

Johnson INC has a project with an initial cost of 130,000. The project is expected to return 20,000 the first year, 50,000 the second year and 100,000 the third and final year. There is no salvage value. The current spot rate is 0.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars? Should Johnson accept the project?