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h o w t o c a l c u l a t e t h e b e n e f i t a n d w h y u s e t h a t t h a n k s ! You have an investment opportunity in Japan. It requires an...
u s e t h a t ？t h a n k s !
. You have an investment opportunity in Japan. It requires an investment of $1.06 million today and will produce a cash flow of ¥ 106 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4.7%, the risk-free interest rate in Japan is 2.9%, and the current competitive exchange rate is ¥ 110 per dollar. What is the NPV of this investment? Is it a good opportunity?
Cost = $1.06 million today
Benefit = (¥1 106) / (1.029 ¥1/¥0) / (110 ¥0/$0) = $0 0.936 million
[Note: for easy reading, I use a currency's subscript to denote the period.]NPV = 0.936 - 1.06 = -$0.124 million.