A U.S. company established a subsidiary in Mexico 2 years ago. Under its original plans, the cocompany intended to operate the subsidiary for a total of 4 years. However, it would like to reassess the situation, since exchange rate forecasts for the Mexican peso now indicate that it may depreciate from its current level of $.049 to $.043 next year and to $.040 in the following year. The company could sell the subsidiary today for 2 million pesos to a potential acquirer. If the company continues to operate the subsidiary, it will generate cash flows of 3 million pesos next year and 4 million pesos in the following year. These cash flows would be remitted back to the parent in the U.S. The required rate of return of the project is 15 percent.

(1) Calculate the present value of the remaining cash flows in U.S. dollars for years 3 and 4.

(2) Calculate the present value of the 2 million pesos in U.S. dollars from the sale of the subsidiary.

(2) Should the company continue operating the Mexican subsidiary? Explain.