Question 3 (20 points)

CanCo. Inc, a Canadian company, is considering a capital investment in its UK subsidiary. The net expected cashflows, in pounds, are as follows:

Year	Cashflow
0	-400,000
1	120,000
2	135,000
3	157,000
4	160,000

All cashflows are after-taxes. The appropriate discount rate for the project is 18%. Currently the Dollar-Pound spot rate is .660 pounds to the dollar.

The current risk-free rate in Canada is 5% and is 9% in the UK. The real-rate of interest is 2.5% in both countries.

1. What is the expected Dollar-Pound spot rate for each of the next 4 years?
2. Would you recommend that CanCo fund the investment? (show your work)
3. Would the project be more or less attractive if the current risk-free rate in Canada was 5% and 12% in the UK? (note: you should be able to answer this in words without any calculations)