Lakonishok Equipment has an investment opportunity in Europe. The project cost is (e)12 million and...

Question

Lakonishok Equipment has an investment opportunity in Europe. The project cost is (e)12 million and is expected to produce cash flows of
 (e)1.8 million in Year 1, (e) 2.6 million in Year 2, and (e)3.5 million in Year 3. The current spot exchange rate is $1.36/(e); the current risk-free rate in the
 United States is 2.3 percent, compared to that in Europe of 1.8 percent. The appropriate discount rate for the project is estimated to be 13 percent, the U.S. cost
 of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated (e)8.9 million. What is the NPV of the project?

Robert · Accepted Answer

Lakonishok Equipment has an investment opportunity in Europe. The project cost is (e)12 million and is 
expected to produce cash flows of (e)1.8 million in Year 1, (e) 2.6 million in Year 2, and (e)3.5 million in 
Year 3.  
The current spot exchange rate is $1.36/(e); the current risk-free rate in the United States is 2.3 percent,

Lakonishok Equipment has an investment opportunity in Europe. The project cost is (e)12 million and is expected to produce cash flows of (e)1.8 million in Year 1, (e) 2.6 million in Year 2, and (e)3.5...

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