Skip to content

CA Final · Advanced Financial Management · International Financial Management

Vasudha Ltd, an Indian company, is evaluating a US project that needs an initial outlay of $1,000,000 now. It will give net cash inflows of $600,000 at the end of year 1 and $700,000 at the end of year 2. The appropriate dollar discount rate is 10%, and the current spot rate is ₹80 per $. Using the foreign currency NPV method and converting at spot, what is the project NPV in rupees?

The NPV is about ₹99.17 lakh. Discount the dollar flows at 10%, giving 545,455 plus 578,512 less the 1,000,000 outlay, which is $123,967. Converting this dollar NPV at the spot rate of ₹80 gives ₹99.17 lakh.

  1. A₹99.17 lakhCorrect
  2. B₹75.00 lakh
  3. C₹2.40 crore
  4. D₹1.24 lakh

Explanation

NPV in dollars = 600,000/1.10 + 700,000/1.21 − 1,000,000 = 545,455 + 578,512 − 1,000,000 = $123,967. At ₹80 this is about ₹99.17 lakh. Discounting at 12% gives ₹75 lakh, which uses the wrong rate, and the undiscounted sum ignores the time value of money.

Did you get it right without looking?

One question tells you little. A timed set on International Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise International Financial ManagementFree diagnostic mock

More International Financial Management questions