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You are a Canadian investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future.The spot exchange rate is S = 1.8839 CAD/GBP and the forward rate is F 1 = 1.8862 CAD/GBP.The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate GBP discount rate is 5.24%.
-The present value (PV)of the £5 million cash inflow computed by first discounting the pounds and then converting into dollars is closest to:

Question

Quizplus · Accepted Answer

To calculate the present value of £5 million cash inflow, we need to first discount the pounds and then convert them into dollars.

Discounting the pounds:

PV(£5 million) = £5 million / (1 + 5.24%) = £4,758,245.61

Converting into dollars:

PV = £4,758,245.61 x 1.8839 CAD/GBP = 8,950,494.96 CAD

Rounding to the nearest dollar, the answer is 8,950,495.

Therefore, the best choice is B.

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