You Are Analyzing a Project with an Initial Cost of £80,000

question 238

Multiple Choice

You are analyzing a project with an initial cost of £80,000. The project is expected to return £10,000
the first year, £40,000 the second year and £50,000 the third and final year. The current spot rate is £.56. The nominal risk-free return is 5 percent in the U.K. and 7 percent in Canada. The return relevant to the project is 8 percent in the U.K. and 9.25 percent in Canada. Assume that uncovered
Interest rate parity exists. What is the net present value of this project in dollars?

• A) $7,787
• B) $8,002
• C) $8,312
• D) $8,511
• E) $8,885

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Definitions:

Treasury Bonds

Long-term government securities issued with the purpose of financing government spending and are seen as low-risk investments.

Treasury Bills

Short-term government securities issued at a discount from their face value, with maturities ranging from a few days to 52 weeks.

Volatile

Describes an investment or market that shows frequent and significant price changes over a short period of time.

Nominal Rate of Interest

The rate of interest before adjusting for inflation, reflecting the rate at which money grows over time.