An Australian firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100 000 euros after one year. If the one-year forward exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV)of the project cash flows?

Question

Quizplus · Accepted Answer

1. Convert the euro cash flows into dollars:
100,000 euros * $1.50/euro = $150,000
2. Calculate the present value using the dollar cost of capital:
PV = $150,000/(1+0.08) = $138,888.89
Therefore, the PV of the project cash flows is $138,888.89, which is closest to option B, $138,889.

An Australian Firm Is Planning to Make an Investment in Europe