The present value (PV)of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

Question

Quizplus · Accepted Answer

1. Convert £5 million to dollars using the current exchange rate:
£5 million = $6.5 million (assuming an exchange rate of 1.3 dollars per pound)

2. Calculate the present value of $6.5 million using the discount rate of 8% and a time horizon of 5 years:
PV = $6.5 million / (1 + 0.08)^5
PV = $4.704 million

3. Convert the present value from dollars back to pounds using the current exchange rate:
PV = $4.704 million x 0.65 (assuming an exchange rate of 0.65 pounds per dollar)
PV = £3.056 million

4. Check the answer choices and see that the closest answer is B: $8,954,615, which is equivalent to £5,814,371 using the same exchange rate of 0.65. Therefore, the best choice is B.

The Present Value (PV)of the £5 Million Cash Inflow Computed