Explain the process to get to the answer:

7) You are considering a project in South Africa. The expected cash flows in South African Rand (R) from the project are provided in the time line below. Suppose that in any given year there is a 60% chance that the South African government will expropriate your assets. If your assets are expropriated in a particular year, then you will not receive that year's or any later year's cash flow from your investment. The discount rate for similar projects in the United States is 35%. The discount rate for similar projects in the South Africa is 45%. Assume the parity conditions do not hold. The current spot rate is 7.38 R/$. The rand is expected to depreciate by 10% each year for the next four years. What is the NPV of expropriation risk from the project perspective? Show all necessary calculations to support your answer.

-1,000,000R 2,000,000R 3,250,000R 5,000,000R 8,000,000R

0 1 2 3 4

60%-1=.4

ACF₀ = -1,000,000R

ACF₁ = 2,000,000R (.4) = 800,000R

ACF₂ = 3,250,000R(.4²) = 520,000R

ACF₃ = 5,000,000R(.4³) = 320,000R

ACF₄ = 8,000,000R(.4⁴) = 204,800R

I =45%

NPV_{with expropriation risk} = -49,656.36R = -6,728.50$

NPV_{with out expropriation risk} = 5,374,920.29R = 728,308.98$

NPV_{of expropriation risk} = -5,424,576.65R = -735,037.48$ ???