Suppose that a United States firm is considering an investment that will yield cash flows in Canadian dollars. The projects cash flows will be the following: Initial cost = C$-1,000,000, Year 1 = C$550,000, Year 2 = C$340,000, Year 3 = C$125,000. The U.S. firm plans to evaluate the project by discounting the cash flows at the Canadian cost of capital of 7% and then converting the NPV back to U.S. dollars at the current spot rate which is $0.8213/C$. What is the NPV of the project in U.S. dollars?

Question

Quizplus · Accepted Answer

To calculate the correct answer you just need to discount each Canadian dollar cash flow using the appropriate discount rate of 7%. When you do this you get a NPV of C$-86,975. You then need to convert this Canadian dollar figure to U.S. dollars using the current spot rate $0.8213/C$. This gives you a U.S. dollar amount of $-71,433.

Suppose That a United States Firm Is Considering an Investment