XYZ Ltd. Is considering a project in Luxemburg, which will involve an initial investment of € 1,30,00,000. The project will have 5 years of life. Current spot exchange rate is Rs.58 per €. The risk free rate in Germany is 8% and the same in India is 12%. Cash inflow from the project are as follows:

Calculate the NPV of the project using foreign currency approach. Required rate of return on this project is 14%.
Solution
(1 + 0.12) (1+Risk Premium) = (1+ 0.14)
Or, 1 + risk Premium = 1.14/1.12 = 1.0179
Therefore, Risk adjusted dollar rate is = 1.0179 x 1.08 = 1.099 – 1 = 0.099
Calculation of NPV

Therefore, Rupee NPV of the project is = Rs. (58 x 0.924) Million
= Rs.53.592 Million
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