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You are a U.S.investor who is trying to calculate the present value of £5 million cash inflow that will occur one year in the future.The spot exchange rate is S = $1.8839/£ and the forward rate is F1 = $1.8862/£.The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
-The present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:

Question

Quizplus · Accepted Answer

The present value of the £5 million cash inflow can be calculated by first discounting the pounds and then converting the discounted pounds into dollars using the spot exchange rate.

Step 1: Discount the pounds using the £ discount rate
PV(£) = £5 million / (1 + 0.0524) = £4,759,299.59

Step 2: Convert the discounted pounds into dollars using the spot exchange rate
PV($) = £4,759,299.59 × $1.8839/£ = $8,950,494.60

Therefore, the present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to $8,950,495 (Option B).

Use the Information for the Question(s)below