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Hello sir,
In the year 0 of the project, they converted the ARD using the exchange rate in 1 Years time (which makes sense as the project is to be started in a years time)
But when discounting the cash flows, we discount the cash flow in year 0 with 1 (as the question stated “based on the end of year one (when the project commences) being time 0”Isn’t this an inconsistency that for year 0, we are using exchange rate in 1 years time but discounting it with time 1 (time 0)??
What I did was for year 0, use the exchange rate in 1 years time and discounted it with 1/1.12
Kindly solve the confusionThe question says to use the end of the first year as time 0.
Given that the first flows occur at the end of the first year (i.e. time 0) they don’t need discounting.
Yeah I know..But isn’t this inconsistent as we are using the exchange rate after 1 year..But discounting it with time 0?
No. Time 0 is in 1 years time and so we need the exchange rate in 1 years time. But it doesn’t then need discounting because time 0 is in 1 years time.
Oh got it.. However it is quite difficult to interpret such things under time pressure…Would I lose a lot of marks for such mistakes??
No, you would not lose many marks (the question wording was very confusing).
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