Question

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1, €3.6 million in year 2, and €3.7 million in year 3. The current spot exchange rate is $1.13/€; the current risk-free rate in the United States is 4.4 percent, compared to that in Europe of 5 percent. The appropriate discount rate for the project is estimated to be 18 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 €8.3 million. What is the NPV of the project?

Multiple Choice

• $-2,931,556.43

• $11,459.60

• $11,917.98

• $11,001.22

• $391,852.70

Use the information below to answer the following questions.

	Currency per U.S. $
U.K. Pound	0.5135
6-months forward (£)	0.5204
Japan Yen	108.21
6-months forward (¥)	106.96
Switzerland Franc	1.0492
6-months forward (SF)	1.0478

Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 5.3 percent.

What must the six-month risk-free rate be in Great Britain?

6.64% 6.73% 3.97% 7.91% 6.38

What must the six-month risk-free rate be in Japan?

4.14% 4.12% 6.46% 4.33% (4.30)

What must the six-month risk-free rate be in Switzerland?

5.17% 4.17% 5.43% 5.37% 5.96%

Answer 1

no excel function is used. simple calculations.