1. You want to invest in a project in Wonderland. The project has an initial cost of W$580,000 and is expected to produce cash inflows of W$260,000 a year for three years. The project will be worthless after three years. The expected inflation rate in Wonderland is 2.1 percent while it is 1.9 percent in the U.S. The applicable interest rate in Wonderland is 10 percent. The current spot rate is W$1 = $.91. What is the net present value of this project in U.S. dollars using the foreign currency approach?
$54,413.82
$58,606.44
$60,589.18
$62,785.15
$64,234.67
2. Assume you have £250 and can exchange C$430 for £250. Also assume you can exchange $1 for C$1.04 and £1 for $1.63. How much arbitrage profit in pounds can you earn? (Ignore transaction costs.)
£2.96
£3.15
£3.47
£3.66
£3.83