Ityesi, Inc., a manufacturer of custom packaging products headquartered in Canada, wants to value a project in the United Kingdom. Ityesi is considering introducing a new line of packaging in the United Kingdom that will be its first foreign project. The project will be completely self-contained in the United Kingdom, such that all revenues are generated and all costs are incurred there. Engineers expect the technology used in the new products to be obsolete after four years. The expected GBP free cash flows of the proposed project are projected in the following table

Year

0

1

2

3

4

Pound free cash flow

-17,500

11,250

11,250

11,250

11,250

Suppose that the current spot exchange rate between Canadian dollars (CAD) and British pounds (GBP), S, is 2.00 CAD/GBP. In addition, suppose that the inflation rate in Canada is 3% and in the United Kingdom is 4%. Ityesi's required return on dollar investment of this sort is 10%.

A)Use the purchasing power parity to estimate the spot rate between CAD and GBP 1, 2, 3, and 4 years later.

B)According to the future spot rates obtained in part A), what are the CAD free cash flows from the project?

C)Based on your calculations in parts A) and B), calculate the CAD NPV of the project.

D)What is the GBP equivalent of the CAD 10% discount rate?

E)Based on the GBP discount rate in part D), calculate the GBP NPV of the project. Is it the same as the answer in part C)? Why or why not?

F)If Ityesi expects a real depreciation of the GBP in the following 4 years, what would happen to the CAD NPV of the project? Describe the methods that you can use to mitigate this risk.