A financial manager has determined that the appropriate discount rate for a foreign project is 15 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rates in the United States and in the foreign country are expected to be 8 percent and 4 percent, respectively.

Question

Quizplus · Accepted Answer

The correct discount rate in the foreign country is 11 percent. This is because the discount rate in the United States is 15 percent, and the inflation rate in the United States is 8 percent. The inflation rate in the foreign country is 4 percent. Therefore, the real discount rate in the foreign country is 15 percent - 8 percent = 7 percent. The nominal discount rate in the foreign country is 7 percent + 4 percent = 11 percent.

A Financial Manager Has Determined That the Appropriate Discount Rate