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 foreign discount rate can be calculated using the formula: (1 + domestic rate) * (1 + foreign inflation rate) / (1 + domestic inflation rate) - 1. This gives (1 + 0.17) * (1 + 0.08) / (1 + 0.03) - 1 = 0.22 or 22 percent.

A Financial Manager Has Determined That the Appropriate Discount Rate