A U.S.-based 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

D) Present Value = (Cash Flows × Forward Rate) / (1 + cost of capital)
Present Value = (100,000 euros × $1.5/euro) / (1 + 0.08) = $138,889

A US-Based Firm Is Planning to Make an Investment in Europe