Solve 13.5

13.5 Consider the investment in China from Problem 13.1. a. Suppose that a manager expects the following future exchange rates: rity does not hold. E[S, ILS/CNY) = ILS 0.5801/CNY E[S, ILS/CNY) = ILS 0.6089/CNY E[S, ILS/CNY) = ILS 0.6392/CNY Using a yuan discount rate of 11.745 percent and the shekel discount rate of 15 percent, calculate NPV from the parent and project perspectives. Should the manager invest in the project? Should the manager hedge the project's currency risk exposure? b. Repeat part (a) using the following expected spot rates of exchange: E[S, LS/CNY) = ILS 0.5575/CNY E[S, ILS/CNY) = ILS 0.5625/CNY E[S, ILS/CNY) = ILS 0.5676/CNY Should the manager invest? Should the manager hedge the projects currency risk exposure? Cross-border capital budgeting under the international parity conditions. 13.1 You work for an Israeli company that is considering an investment in China's Sichuan province. The investment yields expected after-tax Chinese new yuan cash flows (in millions) as follows: +CNY 200m +CNY500m +CNY300m -CNY600m Expected inflation is 6 percent in shekels and 3 percent in yuan. Required returns for this risk-class are ILS = 15 percent in Israeli shekels and iCNY = 11.745 percent in yuan. The spot exchange rate is S, ILS/CNY = ILS 0.5526/CNY. Assume the international parity condi- tions hold. a. Calculate V, ILS/CNY by discounting at the appropriate risk-adjusted yuan rate iCNY and then converting into shekels at the current spot b. Calculate V. ILS/ILS by converting yuan into shekels at expected future spot rates and then discounting at the appropriate rate in shekels. rate