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An abstract illustration symbolizing financial or economic concept related to project investment. Show a balance scale with two sides, on one side, there should be a bag of gold coins representing an initial investment of 1.8 million Australian dollars. On the other side, there should be three bags of cash representing the expected three-year return of AUS$710,000 each year. To represent the 7.5% interest rate, depict a small hourglass partially filled at the center of the balance. In the background, subtly include the outline of the Australian continent as a geographical reference. Use a color palette dominated by gold, green, and blue.

An Australian project has an initial cost of AUS$1. 8 million and is expected to produce cash inflows of AUS$710,000 a year for 3 years after which time it will be worthless. The expected inflation rate in Australia is 4 percent while it is only 3 percent in the U. S. The applicable interest rate in Australia is 7. 5 percent. The current spot rate is AUS$1 = $. 88. What is the net present value of this project in Australian dollars?AUS$63,264. 39AUS$33,974. 02AUS$30,751. 18AUS$46,373. 28AUS$29738. 86

To calculate the net present value (NPV) of the project, we need to discount the cash inflows by the inflation rate and the interest rate.

First, let's calculate the present value (PV) of the cash inflows:

Year 1: PV = AUS$710,000 / (1 + 0.04) = AUS$682,692.31
Year 2: PV = AUS$710,000 / (1 + 0.04)^2 = AUS$657,455.63
Year 3: PV = AUS$710,000 / (1 + 0.04)^3 = AUS$633,064.52

Next, let's calculate the PV of the initial cost:

PV = AUS$1.8 million / (1 + 0.04) = AUS$1,730,769.23

Now, let's convert the PV amounts from Australian dollars to U.S. dollars using the current spot rate:

PV in U.S. dollars:
Year 1: AUS$682,692.31 * 0.88 = $600,000
Year 2: AUS$657,455.63 * 0.88 = $578,281.30
Year 3: AUS$633,064.52 * 0.88 = $556,652.17
Initial cost: AUS$1,730,769.23 * 0.88 = $1,521,538.46

Now, let's calculate the NPV in U.S. dollars by subtracting the initial cost from the sum of the PVs of the cash inflows:

NPV = (600,000 + 578,281.30 + 556,652.17) - 1,521,538.46 = -$776,605.99

Finally, let's convert the NPV from U.S. dollars to Australian dollars using the current spot rate:

NPV in Australian dollars: -$776,605.99 / 0.88 = -AUS$882,823.16

Therefore, the net present value of this project in Australian dollars is approximately -$882,823.16.

None of the answer choices provided match the calculated NPV.

To calculate the net present value (NPV) of the project in Australian dollars, you need to discount the cash inflows at the applicable interest rate in Australia. Here are the steps to follow:

Step 1: Calculate the present value of each cash inflow:
PV = CF / (1 + r)^n

Where:
PV = Present Value
CF = Cash Flow
r = Discount rate (applicable interest rate)
n = Number of periods

Cash inflow Year 1 = AUS$710,000
PV1 = 710,000 / (1 + 0.075)^1 = AUS$663,636.36

Cash inflow Year 2 = AUS$710,000
PV2 = 710,000 / (1 + 0.075)^2 = AUS$619,340.09

Cash inflow Year 3 = AUS$710,000
PV3 = 710,000 / (1 + 0.075)^3 = AUS$570,280.89

Step 2: Calculate the present value of the initial cost:
PV(initial cost) = AUS$1,800,000 / (1 + 0.075)^0 = AUS$1,800,000

Step 3: Calculate the net present value (NPV):
NPV = PV(inflows) - PV(initial cost)
NPV = PV1 + PV2 + PV3 - PV(initial cost)
NPV = AUS$663,636.36 + AUS$619,340.09 + AUS$570,280.89 - AUS$1,800,000
NPV = AUS$53,257.34

Step 4: Convert the NPV to U.S. dollars using the spot rate:
NPV in U.S. dollars = NPV in Australian dollars * Spot rate
NPV in U.S. dollars = AUS$53,257.34 * $0.88
NPV in U.S. dollars = $46,866.14

Therefore, the net present value of this project in Australian dollars is AUS$53,257.34.