ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions
A UK firm will receive a cash flow of 5,400 million won in one year from a project in Korea. The spot rate is 1,800 won/£. Expected inflation is 6% in Korea and 2% in the UK. Using purchasing power parity, what is the expected sterling value of the cash flow in one year (to the nearest £000)?
The sterling value is about £2,887,000, which is not listed.
- A£3,059,000Correct
- B£3,000,000
- C£3,180,000
- D£2,941,000
Explanation
Forecast rate in one year = 1,800 x 1.06/1.02 = 1,870.59 won/£. Sterling value = 5,400m / 1,870.59 = £2.887m. This differs from the listed answer, so the key does not reconcile.
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