Applying the Purchasing Power Parity Theory, which of the following represents the expected net present value of the project in GP£ (to the nearest whole pound)?

A UK based company is considering an investment of GB£1,000,000 in a project in the USA. It is anticipated that the following cash flows will arise from this project.

The cash flows will be either US$400,000 with a probability of 40% or US$700,000 with a probability of 60% for each of the next three years; remitted to the UK at the end of each year.

Currently GB£1.00 is worth US$1.30.

The expected inflation rates in the two countries over the next four years are 2% in the UK and 4% in the US.

Applying the Purchasing Power Parity Theory, which of the following represents the expected net present value of the project in GP£ (to the nearest whole pound)?

A. GB£287,639

B. GB£391,640

C. GB£(111,973)

D. GB£554,047

View Answer

Answer: A