Question

Suppose the dollar-euro exchange rate is 1.56$/€ and the dollar-peso exchange rate is 0.072$/peso. A US firm is considering a new project. The project will cost 2852 pesos and $173 today and will generate 105€ and $142 of revenue next year. The real interest rate is 4%.

a.) What is the present value of cash flow today in dollars?

b.) What is the present value of cash flow from next year in dollars?

Answer 1

ANSWER:

We will convert non dollar figures in dollar first

1 Project cost 2852 pesos, 1 pesos = 0.072$, which means 2852 pesos = $205.34

2. Next year revenue is 105 Euro, 1 euro = 1.56 dollar, which means 105 euro = $163.8

A. Present value of cash flow today in dollars

Today we have cash outflow which will cost today only, that means it present value itself = $205.34 + $173 = $378.34

Thus present value of cash flow of today is $378.34 which is cost

B. Present value of cash flow from next year in dollars

Next year cash flow will be = $163.8 + $142 = $305.8

PVF4%, 1 year = 305.8 / 1.04 =  294.04

$294.04 is present value for next year's cash flow