Describe the two methods for evaluating foreign currency cash flows. Explain the conditions when each method...
Describe the two methods for evaluating foreign currency cash flows. Explain the conditions when each method provides equivalent answers.
Homework Answers
1. Converting the foreign project cash flows to local currency based on expected forward exchange rates and discounting them based on home country cost of capital.
2. Calculating NPV based on foreign country cost of capital and then converting the foreign-currency NPV to local currency at the spot exchange rate.
The two methods give the same NPV of a foreign project when markets are internationally integrated and uncertainty in spot exchange rates are uncorrelated with the foreign currency cash flows.
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Describe the two methods for evaluating foreign currency cash
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