Design Company, a US company, is evaluating the proposed acquisition of a new laser engraving machine. The machine's base price is $100,000 and has a terminal value of $18,000. The company's cost of capital is 5%. The project has a life-time of 3 years. The net cash flows are as follows:

Year 1 Year 2 Year 3

Net cash flow $31,000 $32,000 $28,000

(a) Find the net present value of this project (NPV) and explain what NPV means in this context. Should it be accepted?

Suppose Design Company wishes to expand its operations in the UK. The exchange rate at the time of investment is 1= $1.5.

(b) State the Relative purchasing power parity (PPP) formula. Use the PPP to find the exchange rate 1 year from now, 2 years from now and 3 years from now. The inflation rate in the U.S. (p_$) is 3.5 percent and in the UK 3 percent (p)

(c) What is the Adjusted Present Value (APV) capital budgeting framework? Why is the APV capital budgeting framework useful for analysing foreign capital expenditures?

(d) Find the NPV in pounds. Should Design Company invest in the UK?