Exchange rate 5

Question 1

For convenience when conducting a financial appraisal of a project, we can select the X, t0, as the Y for the calculation of the relative price indices.

Answer 1

first year of the project

arbitrary reference point or base year

Question 2

Using t0 as the base year, then both the values for IDt0 and IFt0 will be equal to X in that year. Hence, there will be no difference between the real and nominal
exchange rates in that Y.

Answer 2

one

base period

Question 3

The real exchange rate will move through time because of shifts in the country’s X

Answer 3

demand and supply for foreign exchange

Question 4

It is very difficult to predict the movement of the real exchange rate unless it is being

Answer 4

artificially maintained at a given level through tariffs or quantitative restrictions on either the supply or demand of foreign exchange

Question 5

In some situations when the real exchange rate is believed to be currently either above or below its longer-term equilibrium level then

Answer 5

a trend in the real exchange rate for a limited number of years may be projected

Question 6

The ratio of the two price indices is known as the

Answer 6

relative price index

Question 7

If through time the domestic economy faces a rate of inflation different than that of foreign trading
partner, the relative price index will

Answer 7

vary over time

Question 8

If the real exchange rate remains constant in the presence of inflation, then the change in the relative price index must result in a

Answer 8

the corresponding change in the market exchange rate.

Question 9

Since the future real exchange rate is only likely to be known with some uncertainty, and the market exchange rate might not adjust instantaneously to changes in the rate of inflation, it is more realistic to allow some X in the estimation of the market exchange rate.

Answer 9

flexibility

Question 10

This is carried out by assuming

Answer 10

a range for the distribution of possible real exchange rates around an expected mean real exchange rate.

Question 11

Much of the published literature on project evaluation recommends the exclusion of inflation
from the appraisal process. These methods only account for projected changes in relative prices of i

Answer 11

Inputs and outputs over the life of the investment.

Question 12

Correctly designing a project to accommodate both changes in X and Y may be crucial for its ultimate survival.

Answer 12

relative prices

changes in the rate of inflation

Question 13

Improper accounting for the impacts of inflation

Answer 13

detrimental effects not only on the financial sustainability of a project but also on its economic viability

Question 14

certain variables such as X need to be estimated in the current prices of the years they incur. (real price as well as inflation)

Answer 14

tax liabilities, cash requirements, interest, and debt repayments

Question 15

X, on the other hand, tend to increase over time as the economy grows

Answer 15

Real wages

Question 16

private opportunity costs of capital or the target financial rates of return used as X be expressed net of any compensation for the expected rate of inflation. In other words, these discount rates must be,

Answer 16

discount rates

real

Question 17

most be real

Answer 17

private opportunity costs of capital or the target financial rates of return

Question 18

If a nominal private cost of capital or target rate of return is used, the result will be a X for the expected changes in the general price level.

Answer 18

double correction

Question 19

real financial prices for the input and output variables developed above are used as the base on which to estimate the X for the benefits and costs of the project.

Answer 19

economic values

Question 20

The structure of the X statement should be similar to that of the financial cash flow statement. The difference between the two statements is analyzed to determine the impacts of the project on various stakeholders.

Answer 20

economic resource flow statement

Question 21

A banker sees a project as an activity that generates X and absorbs Y.

Answer 21

tangible financial benefits

tangible financial resources

Question 22

It disregards any distinctions in the sources of finance but asks the question whether the financial receipts generated from the operations of the project are sufficient to cover the investment and operating expenditures and to provide a sufficient return or not

Answer 22

A banker

Question 23

are irrelevant to the banker.

Answer 23

The historical costs of existing assets

Question 24

The banker typically has the first claim to the project’s ,

Answer 24

assets and net cash flows

Question 25

the banker’s net cash flow is the project’s

Answer 25

gross receipts net of operating and investment expenditures

Question 26

Unlike the banker, the owner adds the loan to the X as cash receipt, and subtracts payments of interest and loan repayment as cash outlays

Answer 26

net cash flows from the total investment point of view

Question 27

the only difference between the analysis from the owner’s point of view and that from the banker’s point of view is

Answer 27

financing

Question 28

The analysis from the government’s point of view is to ensure that the relevant government ministries have

Answer 28

enough resources to finance its obligations to the

project.

Question 29

If the ministry is the project owner, then the distinction between the cash flow statements from the owner’s and the government point of view is the difference in their

Answer 29

opportunity costs of funds

Question 30

economic appraisal of a project adjusts the financial cash flow from the total investment viewpoint for taxes and subsidies and ignores loan and interest payments because these represent flow of funds not

Answer 30

real resources

Question 31

to insure approval and successful implementation a project must be attractive to all the

Answer 31

investors and operators associated with the project

Question 32

just calculate for owner

Answer 32

loan and interest

Question 33

calculate for all

Answer 33

opportunity cost of land

Question 34

there will be no need for including exchange rates

Answer 34

if none of the project’s inputs are imported and none of its outputs are exported.

Question 35

After all the required data have been recorded in the Table of Parameters,

Answer 35

a table of inflation and exchange rates is constructed.

Question 36

The reference year for estimating inflation is usually taken as the X of the project’s life for convenience. As a result, the relative inflation index for the first year of the project will be equal to Y

Answer 36

first year

1.00

Question 37

typically, the project analyst takes the

Answer 37

real exchange rate

Question 38

Quantities sold should be multiplied by X to generate revenues. To determine the nominal price of an item, we first include changes in Y,

Answer 38

nominal prices

real prices

Question 39

The working capital table typically includes two sections.

Answer 39

The first section includes the impacts of working capital on the cash flow statements of the project.

In the second section, the project analyst will estimate the initial working capital requirements for the project. This will be either financed through equity or through debt

Question 40

the impacts of working capital on the cash flow statements of the project.

Answer 40

this includes the changes in accounts receivable, changes in accounts payable, and changes in cash balance

should be linked to nominal sales and/or purchases.

Question 41

In the second section, the project analyst will estimate the initial working capital requirements for the project. This will be either financed through equity or through debt

Answer 41

This will be either financed through equity or through debt.