The current indirect exchange rate is 1.298 NZD per USD. The anticipated annual inflation rate is 1% in the United States and 5% in New Zealand
If the cash inflow in NZD is 200,000 in one year and the discount rate is 7%, what is the present value of the 200,000 NZD in U.S. dollars after conversion from NZD to dollars using the forward exchange rate? Round your answer to the nearest whole dollar.
A) $148,213
B) $142,607
C) $138,517
D) $131,214
Answer: C
Explanation: C) First, we compute the forward exchange rate:
1.298 NZD per USD ∗ (1.05/1.01) = 1.349406 NZD per USD.
Second, we convert all NZD into USD using the forward exchange rate:
200,000 NZD/1.349406 NZD per USD = $148,213.37
Third, we discount the dollar cash flow at the home discount rate:
$148,213.37/(1.07) = $138,517.17 rounded to $138.517.
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