2. [15 Points Suppose that you are the financial manager of a US company and con- sidering a new two-year investment project in UK, which requires an initial capital expenditure of 220 million and will bring in free cash flows of 120 million in the first vear, and 160 million in the second year. You are given the following capital market data: . Interest rates: in US, the yield to maturity (YTM) on one-year risk-free bonds is 3%. and the YTM on two-year risk-free bonds is 7%. In UK, the YTM on one-year risk-free bonds is 10%, and the YTM on two-year risk-free bonds is 12%. Expected inflations: in US, the inflation is expected to be 8% in the first year, and 10% in the second year. In UK, the inflation is expected to be 6% in the first year, and 4% in the second vear. The appropriate discount rate is 20%. The current spot exchange rate is $1.30 . Find the net present value of the project, in dollar terms, for each of the following independent scenarios: (a) Assume uncovered interest rate parity holds. (b) Assume relative purchasing power parity hokls. (c) Assume the spot exchange rate follows a random walk. 2. [15 Points Suppose that you are the financial manager of a US company and con- sidering a new two-year investment project in UK, which requires an initial capital expenditure of 220 million and will bring in free cash flows of 120 million in the first vear, and 160 million in the second year. You are given the following capital market data: . Interest rates: in US, the yield to maturity (YTM) on one-year risk-free bonds is 3%. and the YTM on two-year risk-free bonds is 7%. In UK, the YTM on one-year risk-free bonds is 10%, and the YTM on two-year risk-free bonds is 12%. Expected inflations: in US, the inflation is expected to be 8% in the first year, and 10% in the second year. In UK, the inflation is expected to be 6% in the first year, and 4% in the second vear. The appropriate discount rate is 20%. The current spot exchange rate is $1.30 . Find the net present value of the project, in dollar terms, for each of the following independent scenarios: (a) Assume uncovered interest rate parity holds. (b) Assume relative purchasing power parity hokls. (c) Assume the spot exchange rate follows a random walk