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

Question

Quizplus · Accepted Answer

B) Present Value = (Cash Flows × Forward Rate) / (1 + cost of capital)
Present Value = (100,000 euros × $1.35/euros) / (1 + 0.10) = $122,727

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