
You are a U.S. investor who is trying to calculate the
- a. What is the present value of the ∊[&|euroSer|&]5 million cash inflow computed by first discounting the euro and then converting it into dollars?
- b. What is the present value of the ∊[& |euroSer| &] 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?
a.

To determine: The present value of the cash inflow computed by first discounting the euro and then converting it into dollars.
Introduction: The present value is an amount that an individual makes as an investment at present in order to generate the cash flow in the future. The present value of the cash flows can be computed by adding the cash flow of every stream.
Answer to Problem 1P
Explanation of Solution
The given information:
Cash inflow: €5,000,000.
Spot exchange rate: $1.25/€
Forward rate
Dollar discounted cash flow rate: 4.00%
Euro discount rate: 7.00%.
The formula for calculating the present value by first discounting the euro and then converting it into dollars is as follows:
Calculation of the present value of the cash inflow computed by first discounting the euro and then converting it into dollars is as follows:
For converting it into the dollar, multiply the present value by spot exchange rate as shown below:
Therefore, the present value of the cash inflow is $5,841,121.50.
b.

To determine: The present value of the cash inflow computed by first converting the cash flow into dollars and then discounting.
Answer to Problem 1P
Explanation of Solution
Given information:
Cash inflow: €5,000,000.
Spot exchange rate: $1.25/€
Forward rate
Dollar discounted cash flow rate: 4.00%
Euro discount rate: 7.00%.
The formula for calculating the present value by first converting into cash flow, then into the dollar, and discounting is as follows:
Calculation of the present value of the cash inflow computed by first converting into cash flow, then into dollar, and discounting is as follows:
For converting the cash flow into the dollar, multiply the cash flow by forward rate as shown below:
Therefore, the present value of the cash inflow is $5,841,346.15.
c.

To determine: Whether the markets are internationally integrated, basic of part A and part B.
Answer to Problem 1P
Answer: Yes, the markets are internationally integrated, basic of part A and part B.
Explanation of Solution
Yes, the markets are internationally integrated, basic of part A and part B because, the present value of the cash inflow in part A and part B is approximately identical to each other.
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Chapter 31 Solutions
Corporate Finance
- Crenshaw, Incorporated, is considering the purchase of a $367,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $67,000 in five years. The computer will replace five office employees whose combined annual salaries are $112,000. The machine will also immediately lower the firm's required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 15 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. S 103,141.80arrow_forwardYour firm is contemplating the purchase of a new $610,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $66,000 at the end of that time. You will save $240,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $81,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR %arrow_forwardQUESTION 1 Examine the information provided below and answer the following question. (10 MARKS) The hockey stick model of start-up financing, illustrated by the diagram below, has received a lot of attention in the entrepreneurial finance literature (Cumming & Johan, 2013; Kaplan & Strömberg, 2014; Gompers & Lerner, 2020). The model is often used to describe the typical funding and growth trajectory of many startups. The model emphasizes three main stages, each of which reflects a different phase of growth, risk, and funding expectations. Entrepreneur, 3 F's Debt(banks & microfinance) Research Business angels/Angel Venture funds/Venture capitalists Merger, Acquisition Grants investors PO Public market Growth (revenue) Break even point Pide 1st round Expansion 2nd round 3rd round Research commercial idea Pre-seed Initial concept Seed Early Expansion Financial stage Late IPO Inception and prototype Figure 1. The hockey stick model of start-up financing (Lasrado & Lugmayr, 2013) REQUIRED:…arrow_forward
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