Nominal cash flows in a foreign currency should be discounted ______.

Question

Quizplus · Accepted Answer

Nominal cash flows in a foreign currency should be discounted at a nominal discount rate in the foreign currency. This approach reflects the time value of money and takes into account the inflation expectations in the foreign currency. Using a discount rate in the parent's domestic currency would not capture the foreign currency risk and could lead to incorrect valuation. The weighted average cost of capital, cost of debt, and cost of equity are typically used for domestic projects and are not appropriate for foreign currency cash flows.

Nominal Cash Flows in a Foreign Currency Should Be Discounted