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

question 7

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%.

Assume the cost of capital for this project is 15% on dollar investments. What is the approximate discount rate you would use to discount the cash flows if you were to evaluate this project using the foreign currency approach?

• A) 10%
• B) 12%
• C) 13%
• D) 15%
• E) 18%

---

Definitions:

Journalize

The act of recording business transactions in the journal as part of the accounting process.

Merchandise Sold

Products that have been sold by a company, typically referring to goods rather than services.

Sales On Account

Transactions where goods or services are sold and delivered, but payment is agreed to be made at a later date.

Internal Controls

Processes and procedures implemented by a business to safeguard its assets, enhance the reliability of its accounting records, ensure compliance with laws, and promote efficient operations.