What is the NPV of investment from the parents perspective

Reference no: EM132210527

Question - The following information is used for the next TWO questions.

You work for a firm whose home currency is the Indian rupee (INR) and that is considering a foreign investment. The investment yields expected after-tax Japanese yen (JPY) cash flows (in millions) as follows:

Year 0	Year 1	Year 2	Year 3
-JPY2,100	JPY800	JPY800	JPY800

Expected inflation is 5.0% in the Indian rupee and 2.0% in the Japanese yen. Assume that the international parity conditions hold.

Required returns for projects in this risk class are: i^INR = 16.0% in Indian rupee, and i^JPY = 12.686% in Japanese yen.

The spot exchange rate is S₀^INR/JPY = INR 0.6676/JPY.

Question 1 - What is the NPV of the investment from the parent's perspective? That is, calculate NPV₀^INR|i^INR by first converting the Japanese yen future cash flows into Indian rupee equivalents at expected future spot rates (based on relative PPP) and then discount these cash flows at the appropriate risk-adjusted rate in the Indian rupee.

Question 2 - What is the NPV of the investment from the project's perspective? That is, calculate NPV₀^INR|i^JPY by discounting the Japanese yen cash flows at the appropriate risk-adjusted Japanese yen discount rate and then convert this value into Indian rupee at the today's current spot rate.

Why is the NPV of the first and second question INR 134.16 million? What is the working out for this question?

Reference no: EM132210527

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