A Canadian Firm Is Considering Purchasing a Subsidiary in Great $\le$

question 103

Multiple Choice

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost $\le$ 16 million and will generate cash inflows of $\le$ 7.6 million per year at the end of each of the next three years. After that, the company will be worthless. The current exchange rate is $\le$ 0.83 British pounds per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.

What is the cash inflow for year 3 in terms of Canadian dollars?

• A) $7.88 million
• B) $8.12 million
• C) $8.38 million
• D) $9.16 million

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Definitions:

Investment

The allocation of resources, such as time, money, or effort, in hope of generating a future return or profit.

Internal Rate

Often referred to as the internal rate of return (IRR), it is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Automated Molding

A manufacturing process using machines to produce molds for creating parts or products, often utilized for its precision and efficiency.

Cash Savings

Funds that are put aside and are liquid, allowing for easy access in times of need.