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You are a Canadian investor who is trying to calculate the present value (PV)of a 15 million British pound cash inflow that will occur one year from now.The spot exchange rate is 1.5742 CAD/GBP and the forward rate is F 1 = 1.5682 CAD/GBP.The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate British pound discount rate is 1.45%.
-What is the present value of the pound cash inflow computed by first discounting the pounds and converting them into dollars?

Question

Quizplus · Accepted Answer

First, we need to convert the future cash inflow from pounds to Canadian dollars using the spot exchange rate:
15,000,000 GBP x (1.5742 CAD/GBP) = 23,613,000 CAD

Next, we need to discount this amount for one year at the appropriate Canadian dollar discount rate:
PV = 23,613,000 / (1 + 0.0105) = 23,275,505 CAD

Therefore, the present value of the pound cash inflow computed by first discounting the pounds and converting them into dollars is $23,275,505 CAD.

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