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 $1.35/euro and the dollar cost of capital is 10%, what is the present value (PV)of the project cash flows?

Question

Quizplus · Accepted Answer

First, we need to convert the cash flow from euros to dollars using the forward exchange rate: 100,000 euros * $1.35/euro = $135,000. Then we can calculate the present value using the formula PV = CF / (1 + r), where CF is the cash flow and r is the cost of capital. PV = $135,000 / (1 + 0.10) = $122,727.

An Australian Firm Is Planning to Make an Investment in Europe