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Surfboards U.S.A. is expanding its operations to Australia. The current indirect exchange rate is 1.45. The discount...

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Finance

Surfboards U.S.A. is expanding itsoperations to Australia. The current indirect exchange rate is1.45. The discount rate in the U.S. for the project is 14% and thecompany has forecasted the following Australian dollars (inmillions) for the expansion project:

Year 0

Year 1

Year 2

Year 3

Year 4

A-$30

A$5

A$9

A$16

A$20

     What is theNPV of the project given the risk free rate of interest in eachcountry as shown below?

1 year

2 years

3 years

4 years

U.S. Risk Free Rate

0.137%

0.275%

0.397%

0.606%

Australia Risk Free Rate

2.93%

2.96%

3.06%

3.24%

Answer & Explanation Solved by verified expert
4.2 Ratings (892 Votes)
NOTE The NPV of the Project can be calculated by converting A project cash flow into USD at the exchange rate prevailing at the time of the cash flow To project the exchange rate at each such time one needs to use the interest parity equation to determine expected exchange    See Answer
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Transcribed Image Text

Surfboards U.S.A. is expanding itsoperations to Australia. The current indirect exchange rate is1.45. The discount rate in the U.S. for the project is 14% and thecompany has forecasted the following Australian dollars (inmillions) for the expansion project:Year 0Year 1Year 2Year 3Year 4A-$30A$5A$9A$16A$20     What is theNPV of the project given the risk free rate of interest in eachcountry as shown below?1 year2 years3 years4 yearsU.S. Risk Free Rate0.137%0.275%0.397%0.606%Australia Risk Free Rate2.93%2.96%3.06%3.24%

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