MMM Inc. (an Australian company), is considering building a plant in UK to expand its export market. The plan would cost 100mil to build and will produce cash flows of 20mil, 25mil, 30mil, 35mil, in years 1, 2, 3, and 4, respectively. The investment is risk-free. Other information is:

UK interest rate: 2.1%

Aus interest rate: 1.5%

Spot rate: 0.57/$A

a) Determine the NPV for the project in AUD using the local currency (Pound) approach.

b) Determine the NPV for the project in AUD using the period-by-period conversion approach.

c) Do you think the local currency approach in Question (a) will give you the same answer as the period-by-period conversion in Question (b)? Why or why not?

d) MMM Inc. is worried that building a plant in Japan will cannibalise the sales from its existing plant in Australia and other countries. What is the definition of cannibalisation? Please advise the CEO of MMM Inc., if this cannibalisation concern would change the NPV calculation.