A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5.The NPV for this project will be higher if the foreign currency _________ in year 1 and _________ in years 2 though 5.
A) depreciates;depreciates
B) appreciates;appreciates
C) depreciates;appreciates
D) appreciates;depreciates

Question

Quizplus · Accepted Answer

If the foreign currency depreciates in year 1, the negative cash flow will be worth more in the investor's home currency, leading to a lower initial investment (in home currency terms) and a higher NPV. If the currency then appreciates in years 2 through 5, the positive cash flows will be worth relatively more in the investor's home currency, further increasing the NPV.

A Foreign Project Generates a Negative Cash Flow in Year