1)(4 pts)Flagstaff Corp. is a U.S.based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10 years since the interest rate earned on these securities is so high. Then, after 10 years, it will remit all accumulated earnings to the United States. What is a drawback of using this approach? (Assume the securities have no default or interest rate risk.)

2)(10 pts) Brower, Inc. just constructed a manufacturing plant in Europe. The construction cost 10 million Euros. Brower intends to leave the plant open for three years. During the three years of operation, Euro cash flows are expected to be 1 million euros, 2 million euros, and 3 million euros, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 8 million euros. Brower has a required rate of return of 10 percent. The current exchange rate is $1.18/euro and the Euro is expected to depreciate to $1.15/euro in year 1, $1.14/euro in year 2 and $1.13/euro in year 3.

a)Determine the NPV for this project. Should Brower build the plant?

b)How would your answer change if the value of the euro was expected to appreciate from its current value of $1.18/euro to $1.21/euro in year 1, $1.23/euro in year 2 and $1.25/euro in year 3?