A financial manager has determined that the appropriate discount rate for a foreign project is 17 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 rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively.

Question

Quizplus · Accepted Answer

The appropriate discount rate for a foreign project in the foreign country using the foreign currency should be adjusted for the inflation rate in that country. To calculate the adjusted discount rate, we add the foreign country's inflation rate (8%) to the discount rate (17%), adjusted for the US inflation rate (3%).

Adjusted discount rate = (1 + Discount rate) / (1 + US inflation rate) x (1 + Foreign inflation rate) - 1
Adjusted discount rate = (1 + 0.17) / (1 + 0.03) x (1 + 0.08) - 1
Adjusted discount rate = 0.22 or 22%

Therefore, the appropriate discount rate for the foreign project in the foreign country using the foreign currency is 22%.

A Financial Manager Has Determined That the Appropriate Discount Rate