A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost $\le$16 million and will generate cash inflows of $\le$7.6 million per year at the end of each of the next three years. After that, the company will be worthless. The current exchange rate is $\le$0.83 British pounds per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.

What is the cost of the project in Canadian dollars?

Question

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost

\le

16 million and will generate cash inflows of

\le

7.6 million per year at the end of each of the next three years. After that, the company will be worthless. The current exchange rate is

\le

0.83 British pounds per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.

What is the cost of the project in Canadian dollars?

What is the cost of the project in Canadian dollars?

Quizplus · Accepted Answer

The cost of the project in Canadian dollars is calculated by converting the British pound cost to Canadian dollars using the exchange rate. The cost in British pounds is 16 million. Using the exchange rate of 0.83 pounds per $1, the cost in Canadian dollars is 16 million / 0.83 = $19.28 million.

A Canadian Firm Is Considering Purchasing a Subsidiary in Great ≤\le≤

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