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Romanus Company, a U.K. MNC, is contemplating making a foreign capital expenditure in South Korea. The initial cost of the project is KRW 22,000. The annual cash flows over the seven year economic life of the project in KRW are estimated to be: 4,000; 5,000; 6,000; 7000; 8,000; 9,000; and, 9700. The parent firm's cost of capital in pounds is 7.5%. Long-run inflation is forecasted to be 3.5% per annum in the U.K. and 7.5% in South Korea. The current spot foreign exchange rate is KRW/GBP = 3.75. Determine the NPV for the project in GBP.

Respuesta :

Answer:

GBP 290.41

Explanation:

The net present value of the project is the present value of GBP equivalent of future cash flows discounted at the firm's cost of capital in pounds minus the initial investment outlay of converted to pounds using the spot rate

initial investment outlay= KRW 22,000/ 3.75

exchange rate=spot rate*(1+South Korea inflation rate/1+ U.K.  inflation rate)^n

n is the year whose exchange is computed, it is 1 for year 1 ,2 for year 2 and so on.

Find attached NPV analysis:

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