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You want to invest in a project in Canada. The project has an initial cost of C$828,000 and is expected to produce cash inflows of C$355,000 a year for three years. The project will be worthless after the first three years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. The current spot rate is C$1 = $.9126. What is the net present value of this project in Canadian dollars?

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jepessoa

Answer:

C$24,650

Explanation:

initial cost C$828,000

net cash flows for years 1, 2 and 3 C$355,000

discount rate 12%

the net present value in C$ = C$355,000/1.12 + C$355,000/1.12² + C$355,000/1.12³ - C$828,000 = C$316,964 + C$283,004 + C$252,682 -  C$828,000 = C$24,650

Since we are asked to determine the NPV in Canadian dollars, all we need to do is carry out the same calculations as if they were any other currency. We do not need to make any adjustments due to the exchange rate between US dollars and Canadian dollars.

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