You are considering a project in Poland, which has an initial cost of 250,000PLN. The project is expected to return a one-time payment of 400,000PLN 5 years from now. The risk-free rate of return is 3 % in Canada and 4 % in Poland. The inflation rate is 2 % in Canada and 5 % in Poland. Currently, you can buy 375PLN for $100. How much will the payment 5 years from now be worth in dollars?

A) $101,490
B) $142,060
C) $1,462,350
D) $1,489,025
E) $1,576,515

Question

manal alwan · Accepted Answer

Final Answer : A, Explanation :  The correct answer is A.The payment 5 years from now will be worth 400,000PLN * (1 + 0.05)^5 = 552,563PLN. To convert this to dollars, we divide by the exchange rate of 375PLN/$100, which gives us $1,473,477. To account for inflation in Canada, we divide by (1 + 0.02)^5, which gives us $1,394,634. Finally, to account for the difference in risk-free rates, we divide by (1 + 0.04)^5, which gives us $101,490.

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