Question

When projecting a new foreign project's cash-flows it is recommended to measure cash-flows in the local currency of the host country first before converting them in the parent's reference currency because first and foremost.

a) It captures better the projects sensitivity to changing currency value
b) None
c) It accounts better for the projects capital structure
d) It accounts better for different levels of taxation
e)It captures better incremental cash flows

Answer 1

It is recommended to measure cash-flows in the local currency of the host country first before converting them in the parent's reference currency because it captures better the project's sensitivity to changing currency value.

Step-by-step explanation:

When projecting a new foreign project's cash-flows, it is recommended to measure cash-flows in the local currency of the host country first before converting them in the parent's reference currency. This is because it captures better the project's sensitivity to changing currency value. By measuring cash-flows in the local currency, you can observe how fluctuations in the exchange rate affect the project's profitability. It allows you to understand the impact of currency depreciation or appreciation on the project's cash-flows.