You Are Analyzing a Project with an Initial Cost of £130,000.The

question 56

Multiple Choice

You are analyzing a project with an initial cost of £130,000.The project is expected to return £20,000 the first year,£50,000 the second year and £90,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal risk-free return is 5.5 percent in the U.K.and 6 percent in the U.S.The return relevant to the project is 14 percent in the U.S.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?

• A)-$19,062
• B)-$5,409
• C)$5,505
• D)$9,730
• E)$18,947

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Definitions:

Compound Interest

The interest computed on the principal and any interest earned that has not been paid or withdrawn.

Principal

The original sum of money borrowed in a loan, or the amount of the loan outstanding at any given time, excluding any interest.

Compound Interest

Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.

Principal

The original sum of money borrowed in a loan, or the initial amount of investment, excluding any interest or dividends.