You are an Australian investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?

Question

Quizplus · Accepted Answer

First, we need to convert £15 million into dollars using the spot exchange rate:
£15 million * $1.5742/£ = $23,613,000

Then, we need to discount this dollar amount using the appropriate dollar discount rate of 1.05%:
PV = $23,613,000 / (1 + 1.05%) = $23,359,473.38

Therefore, the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars is $23,278,575 (rounded to the nearest dollar), which is closest to option C.

You Are an Australian Investor Who Is Trying to Calculate