Question

KKR is rigorously evaluating the acquisition of Monzo, a London-based digital-only bank platform. The cost of the acquisition will be £16.9 Million. The projected cash flows from the project will be £4.5 Million for the next six years. The dollar required return is 12% per year and the current exchange rate is £1.16. In addition, KKR has received the recent Market Economic Research Report from Merrill Lynch confirming that Eurodollar rate is closer to 6.5%, while the Euro-pound rate is 4.9%. Determine the NPV of the project? Is the project worth undertaking? (75 POINTS)

Answer 1

	Year	Exchange rate	Exchange rate
	0	£                                                 1.16	£              1.16
	1	=1.16*(1+4.90%)^1/(1+6.5%)^1	£              1.14
	2	=1.16*(1+4.90%)^2/(1+6.5%)^2	£              1.13
	3	=1.16*(1+4.90%)^3/(1+6.5%)^3	£              1.11
	4	=1.16*(1+4.90%)^4/(1+6.5%)^4	£              1.09
	5	=1.16*(1+4.90%)^5/(1+6.5%)^5	£              1.08
	6	=1.16*(1+4.90%)^6/(1+6.5%)^6	£              1.06
Calculation of NPV
						12.00%
Year		Cash flow in Pound	Ex rate	Cash flow in USD	Cash flow in USD	PV factor, 1/(1+r)^time	Present values
0		-£                                               16.90	£         1.1600	=-16.9/1.16	$                 (14.569)	1.0000	$(14.569)
1		£                                                 4.50	£         1.1426	=4.5/1.1426	$                     3.938	0.8929	$    3.517
2		£                                                 4.50	£         1.1254	=4.5/1.1254	$                     3.999	0.7972	$    3.188
3		£                                                 4.50	£         1.1085	=4.5/1.1085	$                     4.060	0.7118	$    2.890
4		£                                                 4.50	£         1.0918	=4.5/1.0918	$                     4.121	0.6355	$    2.619
5		£                                                 4.50	£         1.0754	=4.5/1.0754	$                     4.184	0.5674	$    2.374
6		£                                                 4.50	£         1.0593	=4.5/1.0593	$                     4.248	0.5066	$    2.152
					Net Present Value		$    2.170
	Since NPV is positive, the project should be accepted.