Betta Inc. wants to calculate the present value of a 5 million cash inflow that will occur one year in the future. The spot exchange rate is S = A $ 1.40/ and the forward rate is F =A $1.4139/. Betta Inc. estimates that the appropriate dollar discount rate for this cash flow is 2% and the appropriate euro discount rate is 1%.

Required:

i. What is the present value of the 5 million cash inflow that will occur one year in discounting the euro and then converting it into dollars? [2 marks]

ii. If the Australian and European markets are internationally integrated, would the present value of the 5 million cash inflow be the same if it was calculated by first converting the cash flow into dollars and then discounting using the dollar discount rate? Note that no calculations are required. [1 mark]