First, we need to forecast exchange rates for the next three years.
Future rate (€/$) = Current rate (€/$) x (1 + rate (€)) / (1 + rate ($))
For year 1, rate = 0.500 x (1 + 7%) / (1 + 5%) = 0.510 and so on...
Now, convert the dollar cash flows in euro cash flows with the corresponding exchange rate.
Cash Flow ($) = Cash Flow (€) / rate (€/$)
NPV ($) = - CF0 + CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
= - 4,000,000 + 1,766,355 / (1 + 10%) + 1,733,339 / (1 + 10%)^2 + 1,700,940 / (1 + 10%)^3
= $316,230.720123€/$0.5000.5100.5190.529Cashflow (€)-€ 2,000,000€ 900,000€
900,000€ 900,000Cashflow ($)-$ 4,000,000$ 1,766,355$ 1,733,339$
1,700,940NPV$316,230.72
Solution
First, we need to forecast exchange rates for the next three years.
Future rate (€/$) = Current rate (€/$) x (1 + rate (€)) / (1 + rate ($))
For year 1, rate = 0.500 x (1 + 7%) / (1 + 5%) = 0.510 and so on...
Now, convert the dollar cash flows in euro cash flows with the corresponding exchange rate.
Cash Flow ($) = Cash Flow (€) / rate (€/$)
NPV ($) = - CF0 + CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
= - 4,000,000 + 1,766,355 / (1 + 10%) + 1,733,339 / (1 + 10%)^2 + 1,700,940 / (1 + 10%)^3
= $316,230.720123€/$0.5000.5100.5190.529Cashflow (€)-€ 2,000,000€ 900,000€
900,000€ 900,000Cashflow ($)-$ 4,000,000$ 1,766,355$ 1,733,339$
1,700,940NPV$316,230.72.
