You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?

Question

Quizplus · Accepted Answer

To calculate the NPV of overseas investments, the foreign cash flows need to be converted into the domestic currency using the spot exchange rate. Once the cash flows have been converted, the domestic opportunity cost of capital can be used to discount the cash flows. This adjustment accounts for any potential currency risk and ensures that the investment is evaluated on a consistent basis with other domestic investments. Adjusting the cost of capital by the forward exchange rate (A) is not necessary as it would assume a specific exchange rate in the future, which may not be accurate. Using the domestic discount rate (C) would result in an incorrect evaluation of the investment as it would not account for any foreign currency risk. Using the foreign cost of capital (D) would also result in an incorrect evaluation as it would not account for the cost of capital in the domestic currency.

You Can Value Overseas Investments Using the NPV of the Cash