You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?
A) Convert the opportunity cost of capital and cash flows into foreign currency.
B) Convert the foreign cash flows into domestic currency and use the domestic opportunity cost of capital for discounting.
C) Use domestic discount rate to discount foreign cash flows.
D) Convert the foreign cash flow into domestic currency and use the foreign cost of capital for discounting.

Question

Quizplus · Accepted Answer

To calculate the NPV of overseas investments, one needs to convert the foreign cash flows into domestic currency and use the domestic opportunity cost of capital for discounting. This is because the investors typically use their own domestic currency as the reference point for investment decisions, and they would want to compare the return from the overseas investment with what they could earn in their own currency. Therefore, the foreign cash flows need to be converted into domestic currency to make an apples-to-apples comparison. Discounting the cash flows using the domestic opportunity cost of capital ensures consistency in the calculation of the NPV.

You Can Value Overseas Investments Using the NPV of the Cash