Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,000. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,980, 4,900, 5,890, 6,880, and 7,750. The parent firm's cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75. Required A: Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using fisher effect Required B: Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using PPP rates Required C: Are the two USD NPVs different or the same? Are the two USD NPVs different or the same? Required D: What is the NPV in dollars if the actual pattern of ZAR/USD exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.2, S(3) = 6.5, S(4) = 6.9, and S(5) = 6.9? Note: Negative amount should be shown with a minus sign. Do not round the intermediate calculations. Round the final answer to the nearest whole number. Show less NPV in USD using actual pattern
Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,000. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,980, 4,900, 5,890, 6,880, and 7,750. The parent firm's cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75. Required A: Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using fisher effect Required B: Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using PPP rates Required C: Are the two USD NPVs different or the same? Are the two USD NPVs different or the same? Required D: What is the NPV in dollars if the actual pattern of ZAR/USD exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.2, S(3) = 6.5, S(4) = 6.9, and S(5) = 6.9? Note: Negative amount should be shown with a minus sign. Do not round the intermediate calculations. Round the final answer to the nearest whole number. Show less NPV in USD using actual pattern
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 22P
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Please correct answer and don't use hand raiting
Transcribed Image Text:Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,000. The
annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,980, 4,900, 5,890, 6,880, and 7,750. The parent firm's
cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa.
The current spot foreign exchange rate is ZAR per USD = 3.75.
Required A:
Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot
rate. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using fisher effect
Required B:
Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of
capital. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using PPP rates
Required C:
Are the two USD NPVs different or the same? Are the two USD NPVs different or the same?
Required D:
What is the NPV in dollars if the actual pattern of ZAR/USD exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.2, S(3) = 6.5, S(4) = 6.9, and S(5) = 6.9?
Note: Negative amount should be shown with a minus sign. Do not round the intermediate calculations. Round the final answer to the nearest
whole number. Show less NPV in USD using actual pattern
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