You Want to Invest in a Riskless Project in Sweden

question 34

Multiple Choice

You want to invest in a riskless project in Sweden that has an initial cost of SKr428,000 and is expected to produce cash inflows of SKr231,000 a year for 2 years.The project will be worthless after 2 years.The expected inflation rate in Sweden is 1.7 percent while it is 2.6 percent in the United States.A risk-free security is paying 3.8 percent in the United States.Assume the current spot rate is $1 = SKr7.51.What is the net present value of this project in U.S dollars using the foreign currency approach?

• A)$31,811.70
• B)$3,799.21
• C)$1,951.11
• D)$93,684.44
• E)$110,043.00

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Definitions:

Efficient Allocations

The optimal distribution of resources among competing uses to achieve the highest overall level of welfare or utility.

Market Failures

Situations where the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss.

Government Intervention

Actions taken by a government to affect or interfere in an economy or market, usually in the interest of public welfare or economic stability.

Economic Systems

The organized way in which a country allocates resources and apportions goods and services in the national community.