An American firm is evaluating an investment in Mexico. The project costs 500 million pesos, and it is expected to produce an income of 250 million pesos a year in real terms for each of the next 3 years. The expected inflation rate in Mexico is 4% a year, and the firm estimates that an appropriate discount rate for the project would be about 8% above the risk-free rate of interest. Calculate the net present value of the project in U.S. dollars. Exchange rates are given in Table 22.1. The interest rate is about 4.5% in Mexico and 1.5% in the United States.

* Direct quotes (number of U.S. dollars per unit of foreign currency). Other quotes are indirect (units of foreign currency per U.S. dollar).

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Table 22.1 Countrv Currencv Exchange Rate Europe Euro zone countries Euro (EUR or )* Sweden Switzerland United Kingdom Krona (SEK) Franc (C Pound (GBP or £)* 1.3044 7.0582 1.0094 1.5638 Americas Brazil Canada Mexico Real (BRL) Dollar (CAD 1.7155 1.0326 12.8344 1 Asia/Africa 1.0684 6.723 7.7634 45.83 85.66 7.1546 1,160.00 Australia Dollar (AUD) China Hong Ko Dollar Yen (JPY or ¥ Rand (ZAR) South Africa South Korea Project cost Expected income Project life Expected inflation rate Discount rate Interest rate in Mexico Interest rate in U.S. 500.00 million pesos 250.00 million pesos 3.00 lyears 4.00% 8.00% 4.50% 1.50%