Problem 6. Your firm is thinking of buying an office building in Bangkok, and selling it in one year. You plan to finance this using a two-year loan…

Problem 6. Your firm is thinking of buying an office building in Bangkok, and selling it in one year.

You plan to finance this using a two-year loan from a Chinese bank, in Chinese yuan. The interest rate on the loan is 7% per year. You believe that it is appropriate to use the interest rate on this loan as the discount rate for the project. There are no taxes involved in this transaction.

You assemble some cash flow and exchange rate projections as follows:

                                                                                                                                                                                                                                                                                                                                                                                                                                Year 0                                                                                                                    Year 2

Purchase / sale of office building (THB)                                  30 million                                                                             40 million

Expected Thai baht exchange rate                                                                           30 THB per EUR                 33 THB per EUR                                                                

Expected Chinese yuan exchange rate                                   4 CNY per EUR                   3.8 CNY per EUR

Your boss asks you to calculate the net present value (NPV) of this transaction. In order to present the analysis to the head office in Paris, the NPV needs to be calculated in EUR terms.

a.            Please calculate the net present value of the transaction above in EUR terms. Should you proceed with this project?

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