Y6

Gold Miner Inc., is a US MNC. The company is considering an international investment opportunity in Portugal. This opportunity involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental cleanup. Year 0 Year 1 Year 2 6-L000 6' 160.000 100.000 The initial cost of the project is 64,000. The annual cash flows over the next 2 year economic life of the project in are estimated to be 160,000 and '100,000. The current exchange rate is $1.6 = 1.00. The inflation rate in the US. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.based firm for a domestic project of this risk is 8 percent. (a) Determine the NPV of the project in USD by converting all cash flows from to USD at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. (b) Calculate NPV in by figuring out the equivalent cost of capital (hint: apply the International Fisher Effect). (c) Are the above two NPVs different or the same based on the current spot exchange rate? Please explain. (d) What would be the NPV in USD if the actual exchange rate in year 1 and year 2 is S(1)=1.7/$ and S(2)=1.50/$ respectively