Lakonishok Equipment has an investment opportunity in Europe. The project costs €12million and is expected to produce cash flows of €2.1 million in Year 1, €2.5 million inYear 2, and €3.6 million in Year 3. The current spot exchange rate is 1.36€ / $ and thecurrent risk-free rate in the United States is 2.9 percent, compared to that in Europe of2.1 percent. The appropriate discount rate for the project is estimated to be 15 percent,the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the endof three years for an estimated €9.1 million. Use the exact form of interest rate parity incalculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Donot round intermediate calculations and enter your answer in dollars, not in millions,rounded to two decimal places, e.g., 1,234,567.89)> Answer is complete but not entirely correct.NPV$ 3,964,631.61 x You observe that the inflation rate in the United States is 1.3 percent per year and that T-bills currently yield 1.8 percent annually. Use the approximate international Fisher effectto answer the following questions.a. What do you estimate the inflation rate to be in Australia, if short-term Australiangovernment securities yield 8 percent per year? (Enter your answer as a percentrounded to 1 decimal place, e.g., 32.1.)b. What do you estimate the inflation rate to be in Canada, if short-term Canadiangovernment securities yield 11 percent per year? (Enter your answer as a percentrounded to 1 decimal place, e.g., 32.1.)c. What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanesegovernment securities yield 13 percent per year? (Enter your answer as a percentrounded to 1 decimal place, e.g., 32.1.)X Answer is complete but not entirely correct.a. Australian inflation rateb. Canadian inflation ratec. Taiwanese inflation rate0.5 X %5.5 X %7.5 X %

STEP 1 NPV The discounted future cash flows are added together to create NPV. Because it is so…

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.1 million in Year 1, €2.5 million in Year 2, and €3.6 million in Year 3. The current spot exchange rate is 1.36€/$ and the current risk-free rate in the United States is 2.9 percent, compared to that in Europe of 2.1 percent. The appropriate discount rate for the project is estimated to be 15 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 €9.1 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) Answer is complete but not entirely correct. $ 3,964,631.61 x NPV

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.1 million in Year 1, €2.5 million in Year 2, and €3.6 million in Year 3. The current spot exchange rate is 1.36€/$ and the current risk-free rate in the United States is 2.9 percent, compared to that in Europe of 2.1 percent. The appropriate discount rate for the project is estimated to be 15 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 €9.1 million. Use the exact form of interest rate parity in calculating the expected spot rates. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) Answer is complete but not entirely correct. $ 3,964,631.61 x NPV

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 32QA

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Suppose the U.S. T-bills is 4.76% annually and the U.S. inflation rate is 3.52% annually. If the shor-term Australian government securities is 6.98% per year, what is the inflation rate in Australia. Please use the approximate (not exact form) international Fisher effect for this question ?
(b) Assume AUD = 0.58 GBP and inflation is 3.5% pa in Australia and 7% pa in Great Britain. Estimate the AUD/GBP spot rate in one year's time and comment on the accuracy of this estimate.
You observe that the inflation rate in the USA is 2 percent per year and that T-bills curently yeild 2.5 percent annually. Use the approximate international fisher effect equation in your calculations. a. What do you estimate the inflation rate to be in Austraila, if short-term Austrailian government securities yeild 5 percent per year? Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place e.g. 32.1. b. What do you estimate the inflation rate to be in Canada, if short-term canadian government securities yeild 8 percent per year? Do not round intermediate calculations as mentioned above. C. What do you estimate the inflation rate to be in Taiwaan , if short-term government securities yeild 10 percent per year?
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