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[answered] MNC is contemplating making a foreign capital expenditure i


  • A?U.S.?MNC?is?contemplating?making?a?foreign??capital?expenditure?in?Japan.?The?initial?cost?of?the?project?is?JPY??180,000,000.?The?annual?cash?flows?over?the?five?year?economic?life?of?the??project?in?Japan?are?estimated?to?be?30,500,000,?40,500,000,?60,000,000,??60,600,000,?and?70,800,000.?The?parent?firm?s?cost?of?capital?in?dollars?is??7.5%.?Longrun?inflation?is?forecasted?to?be?3%?per?annum?in?the?U.S.?and?6%?in??Japan.?The?current?spot?foreign?exchange?rate?is?YEN/USD?=?110.?Determine?the??NPV?for?the?project?in?USD?by:
  • 1. Calculating the NPV in JPY using the Japanese equivalent cost of capital according to the fisher effect and then converting to USD at the current spot rate.
  • 2.?Converting?call?cash?flows?from?JPY?to?USD?at??purchasing?power?parity?forecasted?exchange?rates?and?then?calculating?the?NPV??at?the?dollar?cost?of?capital.

Please show step by step work for 1. and .?

 


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