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Why is the revenue recognised in Gamalan currency and the same discount rate applied (9.6%) when it’s a US cash flow?
The product is sold in the US, in US dollars and the question says any US cash flows should be discounted at 7%, so please could someone explain why it’s considered a Gamalan cash flow?
Thanks is advance.
The cash flows occur in Gamalan currency and so the net cash flow is in Gamalan but is then converted to US$ as they are remitted to the US.
The 7% quoted in the question related to cash flows actually in the US (which does not mean remittances to the US from Gamala).
The relevant discount rate to use for the Gamalan flows depends on the risk of the project in Gamala, and the question says that the nature of the project means that the beta (the measure of the risk) is 0.4 more than that of Tramont (in both cases referring to the equity beta).
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