Lakonishok Equipment has an investment opportunity in Europe. The project costs 12 million and is

QUESTION

Lakonishok Equipment has an investment opportunity in Europe. The project costs 12 million and is expected to produce cash fl ows of 2.7 million in year 1, 3.5 million in year 2, and 3.3 million in year 3. The current spot exchange rate is $1.22/ and the current risk-free rate in the United States is 4.8 percent, compared to that in Europe of 4.1 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated 7.4 million. What is the NPV of the project?
$ in millions Year Cashoutfow Cash flows Salvage Value Net Cashflow Discount Factor @ 13% Discounted Amount 0 (12.00) (12.00) 1.00 (12.00) 1 2.70 2.70 0.885 2.39 2 3.50 3.50 0.783 2.74 3 3.30 7.40 10.70 0.693 7.42 Net Present Value 0.55 Spot exchange rate $1.22 Net Present Value in Euros $0.67 $ in millions Year Cashoutfow Cash flows Salvage Value Net

Cashflow Discount Factor @ 13% Discounted Amount 0 (12.00) (12.00) 1.00 (12.00) 1 2.70 2.70 0.885 2.39 2 3.50 3.50 0.783 2.74 3 3.30 7.40 10.70 0.693 7.42 Net Present Value 0.55 Spot exchange rate $1.22 Net Present Value in Euros $0.67

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