Explain the process to get to the answer:

8) You are considering a project in Poland. The expected cash flows in Polish zloty (z) from the project are provided in the time line below. Suppose that in any given year there is a 45% chance that the Polish 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 Poland is 40%. Assume the parity conditions do not hold. The current spot rate is 3.1525 z/$. The dollar is expected to depreciate by 4% 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.

-75,000,000z 60,000,000z 70,000,000z 85,000,000z 98,000,000z

0 1 2 3 4

NPV of Expropriation Risk
Currency d	$
Currency f	ZL
				Adjusted Cash Flows
	CF0	-75,000,000	ZL	-75,000,000	ZL
	CF1	60,000,000	ZL	33,000,000	ZL
	CF2	70,000,000	ZL	21,175,000	ZL
	CF3	85,000,000	ZL	14,141,875	ZL
	CF4	98,000,000	ZL	8,967,613	ZL
	CF5		ZL	0	ZL
	CF6		ZL	0	ZL
	CF7		ZL	0	ZL
	CF8		ZL	0	ZL
Probability of Expropriation	45.00%		Spot Rate in f/d		3.1525	ZL
Spot Rate in d/f	0.317208565	$	per	ZL
Discount Rate for Project in Currency f	40.00%	ZL
	Currency f		Currency d
NPV Without Expropriation Risk	60,058,309	ZL	19,051,010	$
NPV With Expropriation Risk	-33,136,912	ZL	-10,511,312	$
NPV of Expropriation Risk	-93,195,221	ZL	-29,562,322	$