French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10%. The project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is €2.00 = £1.00.
 
Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities:
 
 S₁ (€|£) = €2.20 per £
 
 S₁ (€|£) = €1.80 per £
 
Following revaluation, the exchange rate is expected to remain steady for at least another year.
 

 Find the NPV in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S₁(€|£) = €2.20 per £.

Answer rating: 100% (QA)

To calculate the NPV in euro for the French firm we need to convert the poundden... View the full answer