You work for an Israeli company that is considering an investment in China's Sichuan province. The investment

Question:

You work for an Israeli company that is considering an investment in China's Sichuan province. The investment yields expected after-tax Chinese new yuan cash flows (in millions) as follows:

Expected inflation is 6 percent in shekels and 3 percent in yuan. Required returns for this risk-class are percent in Israeli shekels and percent in yuan. The spot exchange rate is . Assume the international parity conditions hold.

a. Calculate by discounting at the appropriate riskadjusted yuan rate and then converting into shekels at the current spot rate.

b. Calculate by converting yuan into shekels at expected future spot rates and then discounting at the appropriate rate in shekels.

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