1. Estimate the expected cash flows in U.S. dollars
2. Assume the cost of capital is 10% for U.S. projects. China is rated BBB by the rating agencies and BBB bonds trade at 3.5% above U.S. treasury bonds. Chinese equities are twice as volatile as Chinese bonds. What would you use as the discount rate for the Chinese project? (Assume that you cannot diversify the Chinese risk.)
3. Calculate the net present value of the project
4. An analyst looks at your analysis and argues that it should be done entirely in the foreign currency rather than U.S. dollars. How would you respond?

2 (20 points) You are considering a major investment in China and have estimated its cash flows to equity in Chinese yuan for the life of the project as shown in the following table: Year Cash Flows in Chinese Yuan 0 -1,600 1 -800 -1,000 3 150 4 300 5 500 6 650 7 800 8 900 9 1,000 10 1,100 11 1,210 12 1,331 13 1,464 14 1,611 15 1,772 The current exchange rate is 8.5 Chinese Yuan for every U.S. dollar. Because of a limited bond market, the company is forced to rely on purchasing power parity to estimate the expected exchange rates. The expected inflation rate in the U.S. is 3% and it is 12% in China. 2 (20 points) You are considering a major investment in China and have estimated its cash flows to equity in Chinese yuan for the life of the project as shown in the following table: Year Cash Flows in Chinese Yuan 0 -1,600 1 -800 -1,000 3 150 4 300 5 500 6 650 7 800 8 900 9 1,000 10 1,100 11 1,210 12 1,331 13 1,464 14 1,611 15 1,772 The current exchange rate is 8.5 Chinese Yuan for every U.S. dollar. Because of a limited bond market, the company is forced to rely on purchasing power parity to estimate the expected exchange rates. The expected inflation rate in the U.S. is 3% and it is 12% in China