The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar. The 1 year forward rate is 34.175. Ramo Corp. has undertaken a capital project in Bangkok that is expected to produce a cash flow of 17,087,500 bhat at the end of the first year. The company will discount cash flows at a rate of 14%. What is the present value of the first year cash flow in U.S. dollars.

Question

Quizplus · Accepted Answer

To calculate the present value of the cash flow in U.S. dollars, we need to convert the cash flow from bhat to dollars using the spot exchange rate or the 1 year forward rate.

Using the spot exchange rate: 
Cash flow in bhat = 17,087,500
Cash flow in dollars = 17,087,500 / 33.135 = $515,770.03
Present value of cash flow = $515,770.03 / 1.14 = $452,363.16

Using the 1 year forward rate: 
Cash flow in bhat = 17,087,500
Cash flow in dollars = 17,087,500 / 34.175 = $500,000.00
Present value of cash flow = $500,000.00 / 1.14 = $438,596.49

Therefore, the best choice is C.

The Spot Exchange Rate for the Thai Bhat Is 33