Delta Company, a U . S . MNC , is contemplating making a foreign capital expenditure in
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Question:
Delta Company, a US MNC is contemplating making a foreign capital expenditure in
South Africa. The initial cost of the project is ZAR The annual cash flows over
the five year economic life of the project in ZAR are estimated to be
and The parent firms cost of capital in dollars is percent. Longrun
inflation is forecasted to be percent per annum in the US and percent in South Africa.
The current spot foreign exchange rate is ZARUSD
a Determine the NPV of the project in USD by converting the USD cost of capital to the
equivalent ZAR cost of capital using the Interest Rate Parity. marks
b Determine the NPV of the project in USD by converting the ZAR cash flows to the
equivalent USD cash flows using Relative PPP to forecast exchange rates. marks
c Are the two USD NPVs different or the same? Explain your answer. marks
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