7 A professional accountancy institute in the UK is evaluating an investment project overseas in Eastasia, a politically stable country. The project involves the establishment of a training school to offer courses on international accounting and management topics. It will cost an initial 2.5 million Eastasian dollars (EA$) and it is expected to earn post-tax cash flows as follows:

The following information is available:
■ The expected inflation rate in Eastasia is 3 per cent a year.
■ Real interest rates in the two countries are the same. They are expected to remain the same for the period of the project.
■ The current spot rate is EA$2 per £1 sterling.
■ The risk-free rate of interest in Eastasia is 7 per cent and in the UK 9 per cent.
■ The company requires a sterling return from this project of 16 per cent.
Required Calculate the sterling net present value of the project using both the following methods:

(a) by discounting annual cash flows in sterling,

(b) by discounting annual cash flows in Eastasian $.

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Year 1 2 3 4 Cashflow (EA$000) 750 950 1,250 1,350