Home currency approach and uncovered interest parity

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Lakonishok Equipment has an investment in Europe. The project costs €9.5 million and is expected to produce cash flows of €2.7 million in year 1, €3.1 million in year 2, and €2.8 million in year 3. The current spot rate is $1.23/€. The current risk free rate in the United States is 3.2 percent, compared to that of Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 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 €6.5 million. What is the NPV of the project? (HINT: Use the home currency approach and uncovered interest parity adjust the formula to reflect the spot quote order of US vs. foreign currency.)

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Reference no: EM131341467

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