You are considering a project in Norway with an initial cost of NKr135,000. The project is expected to return a one-time payment of NKr200,000 at the end of Year 5. The risk-free rate of return is 2.6 percent in the U. S. and 3.1 percent in Norway. The inflation rate is 1.6 percent in the U. S. and 2.3 percent in Norway. Currently, the exchange rate is $1 = NKr7.0305. Approximately how much will the payment at the end of 5 Years be worth in U. S. dollars?

a. $27,747

b. $28,108

c. $27,472

d. $28,311

e. $27,006

Question

Business

Tomas Carr

24 August, 14:39

You are considering a project in Norway with an initial cost of NKr135,000. The project is expected to return a one-time payment of NKr200,000 at the end of Year 5. The risk-free rate of return is 2.6 percent in the U. S. and 3.1 percent in Norway. The inflation rate is 1.6 percent in the U. S. and 2.3 percent in Norway. Currently, the exchange rate is $1 = NKr7.0305. Approximately how much will the payment at the end of 5 Years be worth in U. S. dollars?

a. $27,747

b. $28,108

c. $27,472

d. $28,311

e. $27,006

+5

Answers (1)

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Paulina Duarte · Answer 1

The payment will be approximately at the end of 5 Years of $27,764.28, so option a is the correct one

Explanation:

In order to calcualte The exchange rate at the end of five years is we have to use the following formula:

= 7.0305 * { (1 + interest rate in Norway) / (Interest rate in US) }^5

= 7.0305 * [ (1.031) / (1.026) ]^5

= Nkr 7.2035 / $

= $1/7.2035 / Nkr

= $0.1388 / Nkr

Henche, The payment to be recieved at the end of 5 years will be NKr 200,000, therefore the value of the payment in dollars is = $27,764.28