You Want to Invest in a Riskless Project in London

question 21

Multiple Choice

You want to invest in a riskless project in London.The project has an initial cost of £50,000 and is expected to produce cash inflows of £28,000 a year for two years.The project will be worthless after two years.The expected inflation rate in the U.K.is 2.2 percent while it is 2.6 percent in the U.S.A risk-free security is paying 3.9 percent in the U.S.The current spot rate is $1 = £.63.What is the net present value of this project in U.S.dollars? Use the foreign currency approach.

• A)$5,065.78
• B)$3,587.74
• C)$2,010.61
• D)$5,211.18
• E)$6,998.04

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Definitions:

Standby Underwriting

A type of underwriting where the underwriter agrees to buy any remaining shares not sold in a public offering, ensuring the issuing company sells all shares.

Underwriting

The process by which insurers, lenders, or investment bankers evaluate and take on the financial risk of a client, based on an assessment of that client's risk profile.

Market Price

The ongoing market cost for the purchase or sale of a service or asset.

Net Present Values

Net Present Values is the plural form of Net Present Value, referring to the calculation that determines the sum of the present values of all future cash flows associated with an investment, less the initial investment cost.