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The project wpuld be viable only if the cash inflow is more than the initial amount of investment. If the cash inflow is less than the cash outflow then the proposed project is not considered to be viable. Therefore, it is essential for the project that cash inflow should exceed cash outflow to reach the viability position. If the invested amount is more when compared from the cash inflow then such projects is considered to be in loss and would not maximize the wealth of the investor effectively. Further, in considering the cash inflow another crucial factor is the consideration of the discounting rate which should be appropriately fixed and effectively taken as per the current market situation. If the discounting rate has been chosen inappropriately then the concluded result would not match with the real scenario of the project thereby making the decision ineffective.
In the given scenario, there is availability of two projects. The first project has been taken place is USD which is in USD and the second project has been taken place in EUR which is in Europe. As USA is one of the most developed countries hence the discounting rate should be less. This signifies that the USD $ would depreciates less when compared from the value of Europe and hence the discounting factor would be less. Therefore, discounting rate for the USA has been taken at the rate of 12%. On the other hand, Europe is not so developed country when compared from the USA and hence the currency of Europe would depreciate more in the future period. Therefore, the discounting factor has been taken more when compared from the discounting rate of USA. The discounting rate of Europe has been taken at the rate of 15% per annum.
In the given scenario, the investment amount of both the project is same that is 20 million. However, the difference is the currency. The cash inflow has been separately given for each of the project with respect to their years. The discounting rate has been fixed at the rate of 12% for the USA project.
Determination of the discounted cash flow of the USA Project .The available cash flow would be discounted at the rate of 12% to generate the discounted cash flow thereby reflecting the correct result of the project.
From the above table it has been concluded that the stated project would need investment of 16 million or less to generate the positive cash inflow in the near future.
Determination of the discounted cash flow of the Europe project .The cash flow has been discounted at the rate of 15%.
From the above data, it has been revealed that Europe Project would be delivering 15.189 million EUR which means any investment of less than the given amount would be acceptable as the same would be delivering positive result to the investors.
In this scenario, the discounting rate has been taken as 12% as the country is most developed.
From the above table, it has been concluded that the NPV of the project is negative as the discounted cash inflow is less than the initial investment amount. This signifies the investors have invested more amounts and the discounted cash inflow is less leads to which the return is negative and hence the proposal should not be accepted.
In the given project, that is USD USA the total amount that would require for the investment is USD is 15 million thereby delivering the NPV positive at the end of the project period.
In this scenario, the discounting rate has been taken as 15%.
From the above table, it has been concluded that the NPV of the project is negative as the discounted cash inflow is less than the initial investment amount.
In the given project, that is EUR Europe the total amount that would require for the investment is USD 15 million thereby delivering the NPV positive at the end of the project period.
Hence, from the above two comparison it has been concluded that USD USA requires more investment when compered from the Europe project and hence the same should not be chosen. The second project which is in Europe should be considered for the purpose of the investment.
Further, it has to be understood that the increase in the discounting rate would decrease the discounted cash inflow and hence the decision would accordingly vary. However, if the discounting rate decreases, the discounted cash inflow would accordingly increases thereby delivering a better result. Therefore, it is essential for every investor to predict the correct discounted rate to arrive at the effective and efficient result for every investment.
The exchange rate among different countries is very uncertain and hence one should take appropriate and careful step to minimize the impact of the fluctuation in exchange rate. There are three measures from which an investor can able to predict the change in the fluctuation rate which is as follows:
There are various ways to mitigate the impact of the possible exchange rate fluctuations which has been discussed below:
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