Answered>Order 1704

u s e t h a t ?t h a n k s !

. You have an investment opportunity in Japan. It requires an investment of $1.06 million today and will produce a cash flow of ¥ 106 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4.7%, the risk-free interest rate in Japan is 2.9%, and the current competitive exchange rate is ¥ 110 per dollar. What is the NPV of this investment? Is it a good opportunity?

Cost = $1.06 million today

Benefit = (¥1 106) / (1.029 ¥1/¥0) / (110 ¥0/$0) = $0 0.936 million

[Note: for easy reading, I use a currency’s subscript to denote the period.]NPV = 0.936 – 1.06 = -$0.124 million.