3 PG plc is considering investing in a new project in Canada that will have a life of four years. Initial investment is C$150,000, including working capital. The net cash flows that the project will generate are C$60,000 per annum for years 1, 2 and 3 and C$45,000 in year 4. The terminal value of the project is estimated at C$50,000, net of tax.

The current spot rate for C$ against the pound sterling is 1.70. Economic forecasters expect the pound to strengthen against the Canadian dollar by 5 per cent per annum over the next four years. The company evaluates UK projects of similar risk at 14 per cent per annum.

Required Calculate the NPV of the Canadian project using the following two methods:

(i) Convert the foreign currency cash flows into sterling and discount at a sterling discount rate.

(ii) Discount the cash flows in C$ using an adjusted discount rate that incorporates the 12-month forecast spot rate.