A Canadian ﬁrm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost £16 million and will generate cash inﬂows of £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 £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%.[LINE][LINE]What is the cash
Inﬂow for year 3 in terms of Canadian dollars?

Question

Quizplus · Accepted Answer

The cash inflow in year 3 is £7.6 million. To convert this to Canadian dollars, we first adjust for the exchange rate: £7.6 million / 0.83 = $9.157 million. Then, we adjust for the inflation differential using the formula: (1 + Canadian inflation rate) / (1 + British inflation rate). Since the British inflation rate can be approximated using the Fisher equation: (1 + 0.08) / (1 + 0.05) = 1.0286. Therefore, the adjusted cash inflow is $9.157 million / 1.0286 = $8.38 million.

A Canadian ﬁRm Is Considering Purchasing a Subsidiary in Great