Question

QUESTION 19

1. Wizz Company plans to invest in a project in Singapore. The project requires an initial investment of SGD592,000 and is expected to produce cash inflows of SGD198,000 a year for four years. The risk-free rate in Singapore is 2.60 percent and the risk-free rate in the U.S. is 2.10 percent. The current spot rate is SGD1 = USD.72. Wizz's required return on US dollar investment of this type is 10%. What is the net present value of this project in U.S. dollars?

   	a	$32,910
   	b	$16,347
   	c	$28,533
   	d	$20,328
   	e	$24,656

Answer 1

Given

SGD 1 = USD 0.72

Risk free rate in Singapore = 2.6%

Risk free rate in U.S = 2.10%

Computation of 1 year forward rate

SGD 1 = USD 0.72

SGD 1 ( 1+ Interest rate in singapore ) ^1 = USD 0.72 ( 1+Interest rate in USA)^1

SGD 1 ( 1+0.026)^1 = USD 0.72( 1+0.021)^1

SGD ( 1.026)^1 = USD 0.72 ( 1.021)^1

SGD 1.026 = USD 1.021*0.72

SGD 1.026 = USD 0.73512

SGD = USD 0.73512/1.026

SGD = USD 0.716491

Computation of 2 year forward rate

SGD 1 = USD 0.72

SGD 1 ( 1+ Interest rate in singapore ) ^2 = USD 0.72 ( 1+Interest rate in USA)^2

SGD 1 ( 1+0.026)^2 = USD 0.72( 1+0.021)^2

SGD ( 1.026)^2 = USD 0.72 ( 1.021)^2

SGD 1.052676 = USD 1.042441*0.72

SGD 1.052676 = USD 0.750558

SGD = USD 0.750558/1.052676

SGD = USD 0.7130

Computation of 3 year forward rate

SGD 1 = USD 0.72

SGD 1 ( 1+ Interest rate in singapore ) ^3 = USD 0.72 ( 1+Interest rate in USA)^3

SGD 1 ( 1+0.026)^3 = USD 0.72( 1+0.021)^3

SGD ( 1.026)^3 = USD 0.72 ( 1.021)^3

SGD 1.080046 = USD 0.72*1.064332

SGD 1.080046 = USD 0.766319

SGD = USD 0.766319/1.080046

SGD = USD 0.709525

Computation of 4 year forward rate

SGD 1 = USD 0.72

SGD 1 ( 1+ Interest rate in singapore ) ^4 = USD 0.72 ( 1+Interest rate in USA)^4

SGD 1 ( 1+0.026)^4 = USD 0.72( 1+0.021)^4

SGD ( 1.026)^4 = USD 0.72 ( 1.021)^4

SGD 1.108127 = USD 0.72*1.086683

SGD 1.108127 = USD 0.782412

SGD = USD 0.782412/1.108127

SGD = USD 0.706067

Year	Forward Rate
1	SGD 1 = USD 0.716491
2	SGD 1 = USD 0.7130
3	SGD 1 = USD 0.709525
4	SGD 1 = USD 0.706067

Year	Cash flow in SGD	Cash flow in USD C alculation	Cash flow in USD
0	-592000	-592000*0.72	-426240.0000
1	198000	198000*0.716491	141865.2180
2	198000	198000*0.7130	141174.0000
3	198000	198000*0.709525	140485.9500
4	198000	198000*0.706067	139801.2660
			137086.4340

Computation of NPV

Year	Cash flow in USD	Disc @ 10%	Discounted Cash flows
0	-426240.0000	1	-426240
1	141865.2180	0.9091	128968.38
2	141174.0000	0.8264	116672.7273
3	140485.9500	0.7513	105549.1736
4	139801.2660	0.6830	95486.14576
	NPV		20436.42658

* NPV = Present value of Cash inflows - Intial outlay

NPV of a project is $ 20436.42568.So option d ) $ 20328 is the correct answer.

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