Bambino Ltd$,$ a United Kingdom $($UK$)$ multinational enterprise, is contemplating making a

foreign capital expenditure in South Africa. The initial cost of the project is ZAR$50$ million. The

annual cash flows over the five$-$year economic life of the project are estimated to be ZAR$13$

million, ZAR$18$ million, ZAR$25$ million, ZAR$10$ million and ZAR$9$ million, respectively. The parent

firm$$s cost of capital in pounds is $7\mathrm{.}5$ per cent. Long$-$run inflation is forecasted to be $4$ percent

per annum in the UK and $12$ percent in South Africa. The current spot foreign exchange rate is

ZAR$/=15\mathrm{.}56.$ Determine the NPV for the project in $$ by

$($a$)$ calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the

Fisher Effect and then converting to $$ at the current spot rate $[6]$

United States Eurozone

Deposit Rate $8\%5\%$

Borrowing Rate $9\%6\%$

$16$

$($b$)$ converting all cash flows from ZAR to $$ at Purchasing Power Parity forecasted exchange

rates and then calculating the NPV at the pound cost of capital $[14]$

$($c$)$ What is the NPV in pound if the actual pattern of ZAR$/$ exchange rates are

S$(0)=15\mathrm{.}56,$ S$(1)=14\mathrm{.}56,$ S$(2)=16\mathrm{.}72,$ S$(3)=15\mathrm{.}78,$ S$(4)=16\mathrm{.}54,$ and S$(5)=16\mathrm{.}32?$

Justify the difference between the actual and the forecasted NPV$.$QUESTION $3$

Bambino Ltd$,$ a United Kingdom $($UK$)$ multinational enterprise, is contemplating making a

foreign capital expenditure in South Africa. The initial cost of the project is ZAR$50$ million. The

annual cash flows over the five$-$year economic life of the project are estimated to be ZAR$13$

million, ZAR$18$ million, ZAR$25$ million, ZAR$10$ million and ZAR$9$ million, respectively. The parent

firm's cost of capital in pounds is $7\mathrm{.}5$ per cent. Long$-$run inflation is forecasted to be $4$ percent

per annum in the UK and $12$ percent in South Africa. The current spot foreign exchange rate is

ZAR $\frac{?}{?}=15\mathrm{.}56.$ Determine the NPV for the project in $$ by

$($a$)$ calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the

Fisher Effect and then converting to $$ at the current spot rate

$($b$)$ converting all cash flows from ZAR to $$ at Purchasing Power Parity forecasted exchange

rates and then calculating the NPV at the pound cost of capital

$($c$)$ What is the NPV in pound if the actual pattern of ZAR$/$ exchange rates are

$S(0)=15\mathrm{.}56,S(1)=14\mathrm{.}56,S(2)=16\mathrm{.}72,S(3)=15\mathrm{.}78,S(4)=16\mathrm{.}54,$ and $S(5)=16\mathrm{.}32?$

Justify the difference between the actual and the forecasted NPV$.$