Exchange rate between columboan dollar and avalonian pound

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In 10 years, Mid-Atlantic Corp. will be investing $150000 either in Columbo or in Avalon. The exchange rate between the Columboan dollar and the Avalonian pound is fixed at $2 = £1. Dollars and pounds can be exchanged at no cost at any time.

If the $150000 is invested in Columbo, each dollar invested will return $0.30 per year for each of the following five years. If the $150000 is converted to pounds and invested in Avalon, each pound invested will return £0.24 per year for the following seven years.

Columbo is subject to ongoing average inflation of 5 percent, while inflation in Avalon averages 3 percent. If the real MARR for Mid-Atlantic is 12 percent, which investment is preferred? How much money should Mid-Atlantic set aside now (invested at the MARR) to ensure that it has enough money to make the investment in 10 years?

Reference no: EM133124767

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