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ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

A project in Country X requires an initial outlay of 900 million pesos and will yield a single inflow of 1,320 million pesos at the end of year 2. Spot rate is 30 pesos per $1. Inflation is 8% in Country X and 2% in the US. The dollar ungeared cost of equity is 10%. Using purchasing power parity to forecast the exchange rate, what is the base-case NPV in dollars (nearest $0.1 million)?

Forecast the year-2 rate by purchasing power parity at about 33.63 pesos per dollar, convert the 1,320 million pesos to roughly $39.25m, discount at 10% to about $32.44m, and subtract the $30m outlay, giving an NPV of about $2.4m.

  1. A$0.4 million
  2. B$2.0 millionCorrect
  3. C$3.6 million
  4. D$5.2 million

Explanation

Forecast year-2 rate = 30 x (1.08/1.02)^2 = 30 x 1.1211 = 33.63 pesos per $. Inflow = 1,320/33.63 = $39.25m. PV at 10% = 39.25/1.21 = $32.44m. Outlay = 900/30 = $30.0m. NPV = $2.44m, about $2.4m.

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