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Question 3: (6 marks) A U.S. firm can invest CAD10 million in its Canadian subsidiary and receive a return of CAD 4.3 million annually for
Question 3: (6 marks)
A U.S. firm can invest CAD10 million in its Canadian subsidiary and receive a return of CAD 4.3 million annually for 3 years. The spot rate is CAD1.25/USD, the U.S. rate of inflation is expected to be 4 percent annually, and the Canadian rate is expected to be 3 percent annually. The appropriate risk-adjusted cost of capital in US dollars is 14 percent.
- Calculate the US $ cashflows each year from the project
- Does the project appear to have a positive NPV?
- What is the companys cost of capital in Canadian dollar?
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