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]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

Quizplus · Accepted Answer

The Answer of 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]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