Capital Budgeting - Essay Example

It is imperative to note that, the expected spot rate appreciation or depreciation is determined by the expected inflation differential (Johnson, 92). RPP is the most useful tool of parity conditions considered in determining whether to accept or reject projects. It is fundamental to note that, RPP predicts the change in the exchange rate over time of the project. The illustration below indicates the most likely setup for NPVs. The table above indicates that all NPVs are positive numbers. It is essential to note that, foreign exchange threat can add, or annihilate the value of the project.

Furthermore, a higher parent prospective foreign exchange, adds value to the project. Similarly, a higher project prospective foreign exchange destroys the value of the project. There are two kinds of NPVs. They include NPV from the project prospective, which does not contain foreign exchange risk. The other type is RPP NPV from the parent prospective. It does contain foreign exchange risk (Johnson, 65). In this circumstance, the project risk gives a slightly positive number. On the other hand, the RPP NPV parent prospective gives a bigger, positive number the foreign exchange risk is included (Johnson, 67).

In this circumstances, the project can be accepted due to the positive number for the Canadian NPV from the parent prospective RPP. More over, the NPV with foreign exchange risk add more value to the project. The Crystal Ball report results, indicates that maximum and minimum scenarios of NPVs from the project and the parent prospective exists. Consider the following table, which illustrates the maximum scenarios for NPVs. It is imperative to note that, despite changes of variables, the maximum scenario for all the NPVs increased in positive values.

In this case, the project could be accepted because NPVs are positive (Johnson, 69). More over, it is fundamental to note that RPP is critical in this course. The value of RPP is observed to be