You have compiled the cash flows of a foreign project denominated in the foreign currency and also the dollar-based cost of capital for the project. To compute the project NPV denominated in dollars, you now need to compute the:
A) current spot rate only.
B) opportunity cost of capital measured in terms of the foreign currency.
C) implied forward exchange rate for each year in which the project has cash flows.
D)actual forward spot rates for each year in which the project has cash flows.

Question

Quizplus · Accepted Answer

To compute the project NPV denominated in dollars, we need to convert the foreign currency cash flows into dollars. This means we need to determine the implied forward exchange rate for each year in which the project has cash flows. This will allow us to convert the foreign cash flows into dollars, so we can discount them using the dollar-based cost of capital and calculate the project's NPV in dollars. The other options, such as the current spot rate and actual forward spot rates, do not provide us with the information we need to convert the cash flows into dollars. Similarly, the opportunity cost of capital measured in terms of the foreign currency is not relevant as we need to determine the NPV in dollars.

You Have Compiled the Cash Flows of a Foreign Project