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Problem 2 [Cross-border Capital Budgeting] You work for an Isracli company considering investing in China's Sichuan province. The investment yield expected after-tax Chinese new yuan
Problem 2 [Cross-border Capital Budgeting] You work for an Isracli company considering investing in China's Sichuan province. The investment yield expected after-tax Chinese new yuan cash flows (in millions) are as follows: - Year 0:-CNY600 - Year 1: +CNY200 - Year 2: +CNY500 - Year 3: +CNY300 The required return for this risk class is iISS=15 percent in Israeli new shekels and 11.745 percent in yuan. Expected inflation is 6 percent in shekels and 3 percent in yuan. Risk-free government bonds in Israel yield 8.12 percent in shekels. China Constaction Bank bonds are risky and yield 6.09 percent in yuan. The spot exchange rate is S0IS/CNY=ILS6.5526/CNY. a. Assume the international parity conditions hold. Calculate V0ILS/iCNY by discounting at the appropriate risk-adjusted yuan rate iCNY and then converting into shekels at the current spot rate. b. Assume the international parity conditions hold. Calculate V0ISSiISS by converting yuan into shekels at the expected future spot rates and then discounting at the appropriate rate in shekels
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