1. 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	11,550	11,250	11,250	11,000

Suppose that the current spot exchange rate between Canadian dollars (CAD) and British pounds (GBP), S, is 1.56 CAD/GBP. In addition, suppose that the inflation rate in Canada is 3% and in the United Kingdom is 5%. Ityesis required return on dollar investment of this sort is 10%.

1. If all parity conditions hold true, what are the British pound value and Canadian dollar value of the investment?

Suppose that Ityesi expects that the exchange rate between CAD and GBP goes from CAD1.56/GBP in year 0 to CAD1.35/GBP in year 1, followed by parity during years 2 to 4. What are the British pound value and Canadian dollar value of the investment? Describe the methods you can use to mitigate this risk.