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