ABC Ltd. is considering a project in US, which will involve an initial investment of US $ 1,10,00,000. The project will have 5 years of life. Current spot exchange rate is Rs. 48 per US $. The risk free rate in US is 8% and the same in India is 12%. Cash inflow from the project is 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)

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

i.e. 9.9%

Calculation of NPV

Therefore, Rupee NPV of the project is = Rs. (48 x 1.013) Million = Rs. 48.624 Million

Also study these questions

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3. AMK Ltd. an Indian based company has subsidiaries in U.S. and U.K.
4. On January 28, 2005 an importer customer requested a bank to remit Singapore Dollar
5. An Indian importer has to settle an import bill for $ 1,30,000.

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