Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Delta Company, a U . S . MNC , is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,600. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,280,5,080,6,070,7,060, and 7,900. The parent firms cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD =3.75.
A. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate.
B. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital.
C. Are the two USD NPVs different or the same?
D. What is the NPV in dollars if the actual pattern of ZAR per USD exchange rates is: S(0)=3.75, S(1)=5.7, S(2)=6.2, S(3)=6.5, S(4)=6.6, and S(5)=6.9?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

A Guide To Starting Your Hedge Fund

Authors: John Thompson, Erik Serrano Berntsen

1st Edition

0470519401, 978-0470519400

More Books

Students also viewed these Finance questions