Omega Industries, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR10 000. The annual cash flows over the five year economic life of the project in ZAR are estimated to be 3 000, 4 000, 5 000, 6 000, and 7 000. The parent firms cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the U.S. and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/US$ = 3.75. Determine the NPV for the project in US$ by:

3.1 Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher Effect and then converting to US$ at the current spot rate. [9]

3.2 Converting all cash flows from ZAR to US$ at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. [12]

3.3 What is the NPV in US dollars if the actual pattern of ZAR/US$ exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.7, S(3) = 7.2, S(4) = 7.7, and S(5) = 8.2? [7]