What is the present value on the investment

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Reference no: EM133331769

Question: Refining company Sharx Plc., headquartered in the US, is making an investment decision in the Czech Republic as it will be closer to a refinery source. The subsidiary in Czech is expected to generate free cash flow of 13 million Czech Korunas (K) in 2023 with an annual growth rate of 8% in the following two years (2024 and 2025). Assuming the investment horizon is 3 years, and the residual value will be 10 times the free cash flow at the end of 2025. The current spot exchange rate (at time 0, year 2022) is K32.0000/$, but the financial manager of Sharx expects the inflation rate in Czech to remain at a relatively high rate of 15% per annum compared to the U.S. dollar inflation rate of 8% per annum. Sharx expects this investment in Czech to generate at least a 20% rate of return per annum.

Required:

(i). What is the present value on the investment if Czech Korunas were to remain fixed over the three year (2023-2025)?

(ii). what is the present value on the investment if Czech Korunas were to change in value over time according to purchasing power parity?

Reference no: EM133331769

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