Question

When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ___ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis. a. should definitely not be; should definitely not be b. should be; should definitely not be c. should be; should be d. should definitely not be; should be

Answer 1

Answer:

b. should be; should definitely not be

Explanation:

When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation should be included explicitly in the cash flow analysis, and debt payments by the subsidiary should definitely not be included explicitly in the cash flow analysis.

Inflation and movements in exchange rates reduces and impacts the value of cashflows and the real returns to be derived from an investment and must be considered in every investment analysis to take account of the time value of money.

Debt payments are NOT a requirement in investment analysis because the interest rate of the loans have been factored into the cost of capital with which the cashflows have been discounted