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

Fwd Rate = Spot rate * [ (1+Hi)^n / ( 1 + Fi ) ^n ]

n specifies Fwd rate for Howmany years.

1 Year Fwd Rate = 0.72 [ (1+ 0.0210)^1 / ( 1 + 0.0260)^1 ]

= 0.72 [ 1.021 / 1.0260 ]

= 0.7165

2 Year Fwd Rate = 0.72 [ (1+ 0.0210)^2 / ( 1 + 0.0260)^2 ]

= 0.72 [ 1.021^2 / 1.0260^2 ]

= 0.72 [ 1.0424 / 1.0527 ]

= 0.72* 0.9903

= 0.7130

3 Year Fwd Rate = 0.72 [ (1+ 0.0210)^3 / ( 1 + 0.0260)^3 ]

= 0.72 [ 1.021^3 / 1.0260^3 ]

= 0.72 [ 1.0643 / 1.0800 ]

= 0.72* 0.9855

= 0.7095

4 Year Fwd Rate = 0.72 [ (1+ 0.0210)^4 / ( 1 + 0.0260)^4 ]

= 0.72 [ 1.021^4 / 1.0260^4 ]

= 0.72 [ 1.0867 / 1.1081]

= 0.72* 0.9806

= 0.7061

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF in SGD	Exchange Rate	CF in USD	PVF @10%	Disc CF
0	-592000	0.72	$ -4,26,240.00	1.0000	$ -4,26,240.00
1	198000	0.7165	$ 1,41,867.00	0.9091	$ 1,28,970.00
2	198000	0.713	$ 1,41,174.00	0.8264	$ 1,16,672.73
3	198000	0.7095	$ 1,40,481.00	0.7513	$ 1,05,545.45
4	198000	0.7061	$ 1,39,807.80	0.6830	$      95,490.61
NPV in USD	$     20,438.79

OPtion D is correct. Difference is due to rounding off.

Pls do rate, if the answer is correct and comment, if any further assistance is required.