Domestic NPV approach. Farbucks is thinking of expanding to South Korea. The current indirect rate for dollars and South Korean won is $1,017$ won per dollar. The expected inflation rate in

South Korea should hover near $0\mathrm{.}6\%$ for the next five years. The expected U$.$S$.$ inflation rate should stay around $3\mathrm{.}6\%.$ The discount rate for expanding is $12\%$ for Farbucks. Given the following

projected cash flows for the expansion project, use the domestic NPV approach to determine whether Farbucks should expand to South Korea.

Year $0$: initial investment costs of $90,000,000$ won per coffee shop

Year $1$ cash flow: $25,000,000$ won

Year $2$ cash flow: $35,000,000$ won

Year $3$ cash flow: $60,000,000$ won

Year $4$ cash flow: $85,000,000$ won

Year $5$ cash flow: $35,000,000$ won

Domestic currency approach in multinational capital budgeting consists of the following steps:

Step $1$: Calculate the forward exchange rates.

Step $2$: Convert all cash flows in foreign currency into dollars using current and forward exchange rates.

Step $3$: Convert all future dollars into present value with the domestic discount rate.

Step $4$: Add the net present value of the outflow and inflow.

Step $5$: Accept the project if its net present value $($NPV$)$ is positive and reject if negative.