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You are considering an investment in Pakistan. One dollar is currently worth 59 Pakistani rupees. An...

You are considering an investment in Pakistan. One dollar is currently worth 59 Pakistani rupees. An investment of 100 million rupees would generate a cash flow of 20 million rupees per year for 20 years. Assume that the beta of this project with the US market is .60, and assume that the risk free rate in the US is 4%, and the market premium in the US is 7%. a. what is the NPV of this project? b. what problems might you have with realizing this NPV? c. how could you reduce the risk with an alternative financing strategy?

Solutions

Expert Solution

Year Beta 0.6

0 -100 -100 Rf 4%

1 20 18.48428835 Risk Premium 7%

2 20 17.0834458 Cost of Capital 8.200%

3 20 15.78876691   

4 20 14.59220602   

5 20 13.48632719 NPV 93.47453381

6 20 12.46425803 Biggest risk to NPV is depreciating Pakistani Rupees

7 20 11.51964698 To mitigate risk, hedge using currency forward contracts.

8 20 10.64662383   

9 20 9.839763239   

10 20 9.094051053   

11 20 8.404853099   

12 20 7.767886413   

13 20 7.179192618   

14 20 6.635113326   

15 20 6.132267399   

16 20 5.667529944   

17 20 5.238012887   

18 20 4.84104703   

19 20 4.474165462   

20 20 4.135088228   

  

jeff jeffy answered 1 year ago
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