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CIMA Exam CIMAPRA19-P03-1 Topic 6 Question 18 Discussion

Actual exam question for CIMA's CIMAPRA19-P03-1 exam

Question #: 18
Topic #: 6

[All CIMAPRA19-P03-1 Questions]

A UK based company is considering an investment of GB1,000,000 in a project in the US

AIt 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 UKat the end of each year.
Currently GB1.00 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)?

AGB287,639

BGB391,640

CGB(111,973)

DGB554,047

Show Suggested Answer

Suggested Answer: A, B, D

by Glen at Oct 24, 2022, 08:27 PM

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Francine

1 months ago

Is it just me, or does this question sound like it's straight out of a Bond villain's playbook? 'The UK company invests in a US project, and the NPV is...something?' I'm already picturing the evil mastermind laughing maniacally.

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Ligia

1 months ago

Ah, the ol' Purchasing Power Parity Theory. I got this. Time to crunch some numbers and see what the expected NPV is.

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Pamella

1 months ago

Haha, this is a classic finance exam question. I remember doing these kinds of problems in my undergrad days. Time to put on my thinking cap!

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Carin

1 months ago

Hmm, this looks like a complex problem, but I think I can work it out. Let me go through the steps carefully.

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Ezekiel

15 days ago

Finally, we can calculate the expected net present value of the project.

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Cristen

19 days ago

Then we can adjust them for inflation using the exchange rate.

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Alonzo

20 days ago

I think we need to calculate the expected cash flows first.

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Queenie

2 months ago

I'm not sure about this one. The Purchasing Power Parity Theory is tricky, and I need to double-check the exchange rate and inflation rate calculations.

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Marica

2 days ago

Finally, calculate the net present value of the project in GBP using the Purchasing Power Parity Theory.

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Natalya

3 days ago

Next, adjust the cash flows for inflation in each country over the next four years.

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Britt

6 days ago

Then, convert those cash flows to GBP using the exchange rate of US$1.30 to GBP1.00.

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Lashandra

10 days ago

Let's break it down step by step. First, calculate the expected cash flows for each year.

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Jacki

2 months ago

That's a good point, I see where you're coming from. It's important to consider all factors when calculating the expected net present value.

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Amber

2 months ago

I disagree, I believe the answer is D) GB554,047 because it considers the probabilities of the cash flows as well.

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Jacki

2 months ago

I think the answer is B) GB391,640 because it takes into account the expected cash flows and inflation rates.

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