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CA Final · Advanced Financial Management · International Financial Management

An Indian company requires a 15% return in rupee terms on foreign projects. The rupee is expected to depreciate against the US dollar by 3% per year. If the company evaluates a US project using dollar cash flows, which dollar discount rate is consistent with its rupee required return (rounded to two decimals)?

The consistent dollar discount rate is 11.65%. Dividing the rupee factor of 1.15 by the expected 3% depreciation factor of 1.03 gives 1.1165. Simple subtraction giving 12% ignores compounding, and multiplying the factors would wrongly give 18.45%.

  1. A18.45%
  2. B12.00%
  3. C11.65%Correct
  4. D15.00%

Explanation

Rupee rate factor = dollar rate factor × (1 + depreciation of rupee). So 1.15 = (1 + r$) × 1.03, giving 1 + r$ = 1.1165 and r$ = 11.65%. Option B subtracts 3% simply and ignores compounding; option A multiplies instead of dividing.

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