Qingyuan Yang hw1 Corporate Finance bu

Interest rates and the Time value of money

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HW1 Corporate Finance
lecture2 3, lecture2 3, DSBI Group Project Instruction(1), Case 1 Assignment X1, Case 1 Assignment X1, 一级公式表

Interest rates and the Time value of money

2. (10 pts) You have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of ¥ 114 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4%, the risk-free interest rate in Japan is 2%, and the current competitive exchange rate is ¥ 110 per $1. What is the NPV of this investment? Is it a good opportunity?

110 x (1 + 2%) / (1 + 4%) = ¥107.88 per $1

114/107.88= $1.057 million

NPV= -1+1.057/(1 + 4%)= $ 0.016 million= $ 16,346

Since NPV>0, it is a good opportunity.

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