In: Finance
Lakonishok Equipment has an investment opportunity in Europe. The project costs €10 million and is expected to produce cash flows of €1.0 million in Year 1, €1.4 million in Year 2, and €2.5 million in Year 3. The current spot exchange rate is $1.25/€; and the current risk-free rate in the United States is 1.8 percent, compared to that in Europe of 1.0 percent. The appropriate discount rate for the project is estimated to be 10 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 €8.0 million. What is the NPV of the project?
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
AS NOTHING WAS MENTIONED, EXCHANGE RATES ARE TAKEN TILL 4 DECIMALS AS STATED IN THE ROSS BOOK. IF WE ROUND THEM TO 2 DECIMALS, ANSWER WILL CHANGE, SO LET ME KNOW, SHOULD I ROUNDING TO 2 DECIMALS. THANK YOU