Question

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?

Answer 1

the present value of project cash flows is $138,888.89

Step-by-step explanation:

The computation of the present value of project cash flows is shown below

Value of €100,000 in US $ in one year is

= €100,000 × $1.50

= $150,000

Now the Present value is

= Payment × (1 ÷ (1 + rate of interest)^number of years)

= $150,000 × (1 ÷ (1 + 8%)^1)

= $138,888.89

Hence, the present value of project cash flows is $138,888.89