Assume that Great Britain charges a duty of 10% on shoes imported into the United Kingdom from the US. San Antonio Boot Co. in the previous question discovers that it can manufacture boots in Belfast in Northern Ireland and import them into Great Britain free of any import duty. Northern Ireland uses the Sterling Pound as its currency.

Despite the added 10% surcharge, suppose that the Belfast facility could produce the following free cash flows in millions of Pounds Sterling ():

Year: 0 1 2 3 4 5

Cash Flows (million ) -8.5 1.5 3.5 2.0 1.0 4.5

The nominal interest rate in the US is 4% (30-year T-Bond) while the rate in the UK is 6% (30-year Sovereign). The current Spot Rate is: 0.6410/$. The 180-day Forward Rate is 0.6474/$. UK lending rates are 7.5%. The 180 day strike price for the Put Option to sell Sterling is: $1.5574/ with a 0.5 cent premium per Sterling Pound. What would be the dollar($) Net Present Value for these projected sterling cash flows?

1. -$1.454367 (b) +$1.46896 (c) +$1.546949 (d) -$1.60656

2. Based on the NPV, should the SA Boot company go to Northern Ireland and make the boots or export them from the San Antonio?

(1) Export

(2) Foreign Direct Investment in N. Ireland