You Are Analyzing a Project with an Initial Cost of £50,000

question 76

Multiple Choice

You are analyzing a project with an initial cost of £50,000. The project is expected to return £10,000 the first year, £35,000 the second year and £40,000 the third and final year. The current spot rate is
£0) 5086. The nominal return relevant to the project is 11 percent in the U.S. The nominal risk-free
Rate in the U.S. is three percent while it is five percent in the U.K. Assume that uncovered interest
Rate parity exists. What is the net present value of this project in U.S. dollars?

• A) $23,611
• B) $25,408
• C) $26,930
• D) $29,639
• E) $30,796

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Definitions:

Yield

The income return on an investment, such as the interest or dividends received, expressed as an annual percentage based on the investment's cost, its current market value, or its face value.

Taxable Bonds

Bonds whose interest payments are subject to federal, state, or local income taxes.

Exercise Price

The cost at which an option's holder may purchase (for a call option) or sell (for a put option) the base asset.

Put Option

A financial contract giving the holder the right, but not the obligation, to sell a specific amount of an underlying asset at a set price within a specified time.