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%.

Assume the cost of capital for this project is 15% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach?

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%.

Assume the cost of capital for this project is 15% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach?

Assume the cost of capital for this project is 15% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach?

Quizplus · Accepted Answer

The Answer of 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%.

Assume the cost of capital for this project is 15% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach?

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

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