Reno, Inc., is considering a project to establish a plant for producing and selling consumer goods in an under developed country. Assume that the host countrys economy is very dependent on oil prices, the local currency of the country is very volatile, governance standards are quite Page | 4 compromised with a high pedigree of unfair practices and the sovereign or country risk is considered to be high. It is known that the host countrys economic conditions are un-related to U.S. economy and the global economy other than material changes that relate and/or emanate in external environment due to oil price changes. Required: a) Should the required rate of return (and therefore the risk premium) on the project be higher or lower than that of other alternative projects in the i) United States; ii) any other G-7 country; iii) Pakistan? Explain with cogent reasons. b) Assume that the required rate of return is 20% in the first year of operations and increases by 2% every year for 5-years. Based on financial projections and estimated cash flows, return on equity (ROE) is expected to be in the ball park of 18% in Year-1, whereas moving forward in Year-2 through Year-5 it is expected to remain in range of 30% per annum. Based on these numbers, would you recommend that Reno should move ahead with this new investment? Why or why not? Explain with cogent reasons.