You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86 million and is expected to produce cash inflows of SKr1.76 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is $1 = SKr7.7274.

Required:

1. What is the net present value of this project in Swedish krona if the International Fisher effect applies?

O SKr1,087,561

O SKr958,029

O SKr701,458

O SKr823,333

O SKr978,177

Question

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Respuesta :

amcool amcool · Answer 1 · 2020-06-06T02:57:05+02:00

Answer:

SKr978,177

Explanation:

Note: Find attached the attached excel file for the full calculation of the net present value of this project in Swedish krona.

Applying International Fisher effect, the risk-free rate of return in Sweden is calculated as follows:

USRF = Risk-free rate of return in the US = 4.1%, or 0.041

USEI = Expected inflation in the US = 2.8%, or 0.028

SWRF = Risk-free rate of return in Sweden = ?

SWEI = Expected inflation in Sweden = 3.2%, or 0.032

Applying International Fisher effect, we have:

USRF - USEI = SWRF - SWEI

Substituting for the values, we have:

0.041 - 0.028 = SWRF - 0.032

0.013 = SWRF - 0.032

SWRF = 0.045

The SWRF of 0.045 as the discount rate to calculate the discounting factor in the attached excel file.