A foreign project generates a negative cash flow in Year 1 and positive cash flows in Years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in Year 1 and ____ in Years 2 through 5.
A) depreciates; depreciates
B) appreciates; appreciates
C) depreciates; appreciates
D) appreciates; depreciates

Question

A foreign project generates a negative cash flow in Year 1 and positive cash flows in Years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in Year 1 and ____ in Years 2 through 5.​
A) ​depreciates; depreciates
B) ​appreciates; appreciates
C) ​depreciates; appreciates
D) ​appreciates; depreciates

Quizplus · Accepted Answer

If the foreign currency depreciates in Year 1, the negative cash flow will be converted into more domestic currency, resulting in a smaller negative impact on NPV. If the foreign currency appreciates in Years 2 through 5, the positive cash flows will be converted into more domestic currency, resulting in a larger positive impact on NPV. Therefore, the NPV will be higher if the foreign currency depreciates in Year 1 and appreciates in Years 2 through 5. Choice C is the only option that matches this criteria.

A Foreign Project Generates a Negative Cash Flow in Year