Alpha Industries, a U.S. MNC, is contemplating making a foreign capital expenditure in the United Arab Emirates. The initial cost of the project is UAE dirham 10 000. The annual cash flows over the five year economic life of the project in UAE dirham are estimated to be 3 000, 4 000, 5 000, 6 000, and 7 000, respectively. The parent firm's cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the U.S. and 7 percent in the United Arab Emirates. The current spot foreign exchange rate is UAE dirham/US$ = 3.75. Determine the NPV for the project in US$ by:

3.1 Calculating the NPV in UAE dirham using the UAE dirham equivalent cost of capital according to the Fisher Effect and then converting to US$ at the current spot rate. [9]

3.2 Converting all cash flows from UAE dirham to US$ at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. [12]

3.3 What is the NPV in US dollars if the actual pattern of UAE dirham/US$ exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.7, S(3) = 7.2, S(4) = 7.7, and S(5) = 8.2? [7]