Question 1

Delta Company, a U.S. MNC is contemplating making a foreign capital expenditure in Mexico. The initial cost of the project is MP 28,000. The annual cash flows over the five-year economic life of the project in MP are estimated to be 5,000, 6,000, 8,000, 9,000 and 9,800. The parent companys cost of capital is dollars is 6.5%. Long-run inflation is forecasted to be 3% per annum in the U.S. and 4.5% in Mexico. The current spot rate is MP/USD = 19.45. Determine the following things:

1. Calculating the NPV in MP using the MP equivalent cost of capital according to fisher effect and then converting to USD at the current spot rate.

2. Converting all the cash flows from MP to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital.

3. Are the two dollar NPV different or the same? Explain.

4. What is the NPV in dollars if the actual pattern of ZAR/USD exchange rate is:

Year 0: MP/USD = 19.45

Year 1 : MP/USD = 21.20

Year 2 : MP/USD = 22.15

Year 3 : MP/USD = 23.63

Year 4 : MP/USD = 24.32

Year 5 : MP/USD = 25.19