Burnley Industries, an Australian manufacturing firm, is considering a new project based in Portugal. The project lasts for three years and initially costs 1\ million Euros (

). The expected free-cash flows of the projects (in

) are shown below:\ The current spot exchange rate is

0.50

per AUD (i.e., 1 AUD

=0.50

). The value of Euros is expected to remain unchanged from its current value of

0.50

\ per AUD over the course of the three years. Burnley has a domestic required rate of return of

12%

.\ You work in the corporate finance department of Burnley Industries, and are responsible for deciding whether to undertake the project. You learned in\ undergraduate degree two methods of valuing a foreign project assuming an internationally integrated capital market: i) NPV conversion method; ii) Free\ cash flow conversion method. Both methods under this assumption will yield the same decision.\ Required:\ a. Explain in words, what an internationally integrated capital market is. [2 marks]\ b. Calculate the NPV for this project. Should Burnley Industries invest in this project? [3 marks]\ c. Does the decision to invest this project based in Portugal depend on the exchange rate forecasts used? Explain. [1 mark]

Burnley Industries, an Australian manufacturing firm, is considering a new project based in Portugal. The project lasts for three years and initially costs 1 million Euros ( ). The expected free-cash flows of the projects (in ) are shown below: The current spot exchange rate is 0.50 per AUD (i.e., 1 AUD =0.50 ). The value of Euros is expected to remain unchanged from its current value of 0.50 per AUD over the course of the three years. Burnley has a domestic required rate of return of 12%. You work in the corporate finance department of Burnley Industries, and are responsible for deciding whether to undertake the project. You learned in undergraduate degree two methods of valuing a foreign project assuming an internationally integrated capital market: i) NPV conversion method; ii) Free cash flow conversion method. Both methods under this assumption will yield the same decision