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Delta Company, a U.S. MNC is contemplating making a foreign capital expenditure in Mexico. The initial cost of the project is MP 28,000. The annual
Delta Company, a U.S. MNC is contemplating making a foreign capital expenditure in Mexico. The initial cost of the project is MP 28,000. The annual cash flows over the five-year economic life of the project in MP are estimated to be 5,000, 6,000, 8,000, 9,000 and 9,800. The parent companys cost of capital is dollars is 6.5%. Long-run inflation is forecasted to be 3% per annum in the U.S. and 4.5% in Mexico. The current spot rate is MP/USD = 19.45. Determine the following things:
- Calculating the NPV in MP using the MP equivalent cost of capital according to fisher effect and then converting to USD at the current spot rate.
- Converting all the cash flows from MP to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital.
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