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What is the expected real value (in terms of today's dollars) of the depreciation charge in year 5, assuming that the tax write-off is taken at the end of the year (business in France)?

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Suppose a firm has just made an investment in France that will generate $2 million annually in depreciation, converted at today's spot rate. Projected annual rates of inflation in France and in the United States are 7 percent and 4 percent, respectively. If the real exchange rate is expected to remain constant and the French tax rate is 50 percent, what is the expected real value (in terms of today's dollars) of the depreciation charge in year 5, assuming that the tax write-off is taken at the end of the year?

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If the real exchange rate is expected to remain constant, then the real dollar value of the French franc is expected to decline at the same rate as the real franc value, namely the 7% ...

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$2.19