Assume you are working for a firm based in the United States that is considering a new

Question:

Assume you are working for a firm based in the United States that is considering a new project in the country of Tambivia. This new project will produce the following cash flows measured in TABs (the currency of Tambivia), which are expected to be repatriated to the parent company in the United States.

Year Cash Flow (in millions of TABs)

0 ................ −12

1 ................ 5

2 ................ 6

3 ................ 7

4 ................ 7

In addition, assume the risk-free rate in the United States is 5 percent, and that this project is riskier than most and, as such, the firm has determined that it should require a 12 percent premium over the risk-free rate. Thus, the appropriate discount rate for this project is 17 percent. In addition, the current spot exchange rate is .60TAB/$, and the one-year forward exchange rate is .57TAB/$. What is the project’s NPV?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...