Thabethe Ltd, a South African-based company, is looking to expand its operations abroad. Thabethe has identified a foreign direct investment (FDI) opportunity in the United States of America (USA). The machine required for the investment will cost $1.5 million and will be depreciated straight-line to zero over its six-year lifespan. The project will require additional net working capital of $50 000 immediately.

The marketing department predicts that sales related to the project will be $1.2 million per year for the next three years, and the cost of goods sold together with operating expenses are predicted to be 30% of sales. The salvage value of the machine after three years is expected to be $150 000.

The required rate of return on similar investments in South Africa is 15%. The inflation rates in South Africa and America are 7% and 5% respectively. The corporate tax rate in America is 30%. The current spot exchange rate is R15.00/$.

Required:

Evaluate the project using the foreign currency approach.