Investment Appraisal under Inflation and Exchange Rate Risk
A multinational company is considering investing €5 million in a project in a foreign country. The expected annual cash inflows are €1.5 million per year for 4 years. The inflation rate in the foreign country is 5%, while in the home country, it is 2%. The current exchange rate is 1 EUR = 1.2 USD, but due to inflation differences, the exchange rate is expected to change as per Purchasing Power Parity (PPP).
(a) Adjust the cash flows for inflation.
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