Purchase Solution

Present Value of Cash Flows in Dollars and Euros

Not what you're looking for?

Ask Custom Question

You are a U.S. investor who is trying to calculate the present value of a ?5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.25/? and the forward rate is F1 = $1.215/?. You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro discount rate is 7%.
a. What is the present value of the ?5 million cash inflow computed by first
discounting the euro and then converting it into dollars?
b. What is the present value of the ?5 million cash inflow computed by first
converting the cash flow into dollars and then discounting?
c. What can you conclude about whether these markets are internationally
integrated, based on your answers to parts (a) and (b)?

Purchase this Solution
Solution Summary

The solution explains how to calculate the present value of cash flows

Solution Preview

a. In this case we discount at the euro discount rate and then convert to $ using the spot exchange rate since the PV is af of now. The cash flow is at the end of 1 year. The PV of cash ...

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • Finance problems:present value,future value,payments etc

    Note: The books of the subsidiary being held in Euros, the exchange rate Euro/US dollars has no influence on the result of the exercise. The solution is presented in an Excel document. The solution is well explained and concise.

  • Which of the following measures an organization's liquidity?

    A project has an initial outflow of $10,000. The project will generate free cash flows of $8,000 per year for two years. The discount rate is 8%. What is this project's net present value (NPV)?

  • Foreign Investment Decisions for the Acme Company using TVM

    Note: The books of the subsidiary being held in Euros, the exchange rate Euro/US dollars has no influence on the result of the exercise. Must be original, use in-text citations, and provide all references.

  • Preparing Analyses for Acme's CFO

    rate used in all questions represents an annual rate and all Euro figures are in whole Euros (not Euros and cents).

  • International Finance: Interest, Subsidiaries and Exchange Rates

    The exchange rate is C$/US$1.014. (1) Calculate the US$ value of the company's cash flows; (2) Would the US$ value of the cash flows increase or decrease with an exchange rate of C$/US$.98 and how much? Show how you derive your answers. 2.

  • Net Present Value - Petrus Company

    Cash flow in US$ in year1 = 1,000,000 X 0.55 = $550,000 Cash flow in US$ in year 2 = 2,000,000 X 0.6 = 1,200,000 Cost of capital = 14% We discount the cash flows to get the present value PV of cash flows = 550,000/1.14 + 1,200,000/1.14^2 = $1,405,817.17

  • Hedging using forward market and money market hedges

    i) Consider hedging the euro payment in the forward market and identify the present value today of the cost in dollars under the forward hedge. ii) Consider hedging the euro payment in the money market.

  • International Finance

    A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _______ in year 1 and _______ in years 2 though 5.

  • Currency Exchange: International Finance

    MNC's optimization of cash flow can distort the profits of each subsidiary. Some of the methods used for optimizing cash flows is accelerating cash flows, minimizing currency conversion costs, and centralized cash management.

  • invest question

    123683 How to calculate what to invest in Suppose the CFO of a German corporation with surplus cash flow has 1million Euros to invest.

View More Related Solutions