An Australian project has an initial cost of AUS$1. 8 million and is expected to produce cash inflows of AUS$710,000 a year for 3 years after which time it will be worthless. The expected inflation rate in Australia is 4 percent while it is only 3 percent in the U. S. The applicable interest rate in Australia is 7. 5 percent. The current spot rate is AUS$1 = $. 88. What is the net present value of this project in Australian dollars?AUS$63,264. 39AUS$33,974. 02AUS$30,751. 18AUS$46,373. 28AUS$29738. 86

Answer 1

To calculate the net present value (NPV) of the project, we need to discount the cash inflows by the inflation rate and the interest rate.

First, let's calculate the present value (PV) of the cash inflows:

Year 1: PV = AUS$710,000 / (1 + 0.04) = AUS$682,692.31
Year 2: PV = AUS$710,000 / (1 + 0.04)^2 = AUS$657,455.63
Year 3: PV = AUS$710,000 / (1 + 0.04)^3 = AUS$633,064.52

Next, let's calculate the PV of the initial cost:

PV = AUS$1.8 million / (1 + 0.04) = AUS$1,730,769.23

Now, let's convert the PV amounts from Australian dollars to U.S. dollars using the current spot rate:

PV in U.S. dollars:
Year 1: AUS$682,692.31 * 0.88 = $600,000
Year 2: AUS$657,455.63 * 0.88 = $578,281.30
Year 3: AUS$633,064.52 * 0.88 = $556,652.17
Initial cost: AUS$1,730,769.23 * 0.88 = $1,521,538.46

Now, let's calculate the NPV in U.S. dollars by subtracting the initial cost from the sum of the PVs of the cash inflows:

NPV = (600,000 + 578,281.30 + 556,652.17) - 1,521,538.46 = -$776,605.99

Finally, let's convert the NPV from U.S. dollars to Australian dollars using the current spot rate:

NPV in Australian dollars: -$776,605.99 / 0.88 = -AUS$882,823.16

Therefore, the net present value of this project in Australian dollars is approximately -$882,823.16.

None of the answer choices provided match the calculated NPV.