Q50000 XYZ Ltd. Is considering a project in Luxemburg

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:

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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

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

                                                                              = Rs.53.592 Million

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