PQR Ltd. is considering a project in US, which involve an initial investment of 124.50 Crore. The project will have useful life of 5 years Current…

CA Final · Advanced Financial Management · MTP · January 2026
PQR Ltd. is considering a project in US, which involve an initial investment of 124.50 Crore. The project will have useful life of 5 years Current spot exchange rate is INR/USD is 83. The risk free rate in US is 4.186% and the same in India is 6.9768%. Cash inflows in USD from the project are as follows: Year 1 2 3 4 5 Cash Inflow 30,00,000 40,00,000 50,00,000 60,00,000 70,00,000 PQR Ltd. is expecting net surplus of 1858.08 lakh to be received after closure of the project. There is no salvage value. PQR Ltd. want to take a forward cover to protect itself from exchange rate fluctuations. N 1 2 3 4 5 PVIF (6.976%, n) 0.935 0.874 0.817 0.764 0.714 PVIF (4.186%, n) 0.959 0.921 0.884 0.849 0.815 PVIF (12%, n) 0.893 0.797 0.712 0.636 0.567 You are required to recommend one INR/USD rate for the forward cover, if required rate of return on this project in Indian Rupee is 15%?

Suggested Answer and Working Notes:

First we shall compute the risk adjusted dollar rate for discounting as follows: (1 + 0.06978) / (1 + Risk Premium) = (1 + 0.15) Or, 1 + Risk Premium = 1.15/1.06978 = 1.0750 Therefore, Risk adjusted dollar rate is = (1.0750 x 1.04186) -1 = 1.1199 – 1 = 0.1199 say 0.12 i.e. 12% Now we shall calculate the NPV of the project as follows: Year Cash flow US$ lakh PV Factor at 12% PV (US$ lakh) 1 30.00 0.893 26.79 2 40.00 0.797 31.88 3 50.00 0.712 35.60 4 60.00 0.636 38.16 5 70.00 0.567 39.69 172.12 Less: Investment 150.00 NPV 22.12 Since PQR Ltd. is expecting a net surplus of USD 22.12 lakh after the closure of the project the recommended forward rate of INR/ USD is 84.00 (₹ 1858.08 lakh/ USD 22.12 lakh).

Topics: International Financial Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic