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CA Final · Advanced Financial Management · International Financial Management

Sundaram Auto Ltd, an Indian company, plans a US project needing an outlay of USD 800,000 today (spot ₹80/USD). Expected cash inflows are USD 500,000 at the end of Year 1 and USD 600,000 at the end of Year 2. The rupee is expected to depreciate by ₹2 per year, so the expected rates are ₹82 (Year 1) and ₹84 (Year 2). The company evaluates the project in rupees at a 10% required return. What is the approximate NPV?

Convert each dollar inflow at its expected future rate, discount at 10% in rupees, and subtract the ₹6.40 crore outlay. PV of inflows is about ₹7.89 crore, giving an NPV of roughly ₹1.49 crore. Using the spot rate for all years understates the value.

  1. A₹1.49 croreCorrect
  2. B₹1.20 crore
  3. C₹2.74 crore
  4. D₹1.91 crore

Explanation

Outlay = 800,000 × 80 = ₹6.40 crore. Year 1 = 500,000 × 82 = ₹4.10 crore, PV at 10% = ₹3,72,72,727. Year 2 = 600,000 × 84 = ₹5.04 crore, PV = ₹4,16,52,893. Total PV = ₹7,89,25,620; NPV = ₹1,49,25,620. Option B wrongly converts every inflow at the spot rate of ₹80.

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