Explain all the processes to get to the answer:

1) An American beverage bottling company that is considering a project in Iceland. The project has the expected cash flows in Iceland kronur (K) provided in the time line below. The current spot rate is 125.25 kronur per dollar (K/$). The dollar is expected to appreciate relative to the kronur by 10% next year, 12% the following year, and 6% each year after that. The parity conditions do not hold. The appropriate discount rate for projects of similar risk in the United States is 20% and in Iceland the appropriate discount rate for projects of similar risk is 30%. What is the NPV from the parent perspective and the project perspective for the project? Should they accept or reject the project? Why? Show all necessary calculations to support your answer.

-10,000,000 K 7,500,000 K 7,500,000 K 7,750,000 K

0 1 2 3

S₀ = 125.25 K/$

S₁ = 125.25 K/$* 1.10 = 137.775K/$

S₂ = 137.775 K/$* 1.12 = 154.308K/$

S₃ = 154.308 K/$ * 1.06 = 163.56648K/$

Parent

CF₀ = -10,000,000K / 125.25K/$ = -$79,840

CF₁ = 7,500,000K / 137.775K/$ = $54,437

CF₂ = 7,500,000K / 154.308K/$ = $48,604

CF₃ = 7,750,000K / 163.56648K/$ = $47,381

I/Y =20%

NPV = $26,699.10

Project

CF₀ = -10,000,000K

CF₁ = 7,500,000K

CF₂ = 7,500,000K

CF₃ = 7,750,000K

I/Y =30%

NPV = K3,734,638 = $29,817