Farbucks is thinking of expanding to South Korea. The current indirect rate for dollars and South Korean won is

$1$

$,$

$0$

$0$

$2$

$$won per dollar. The expected inflation rate in South Korea should hover near

$0$

$.$

$8$

$$

$\%$

$$for the next five years. The expected U

$.$

S

$.$

$$inflation rate should stay around

$$

$3$

$.$

$4$

$\%$

$.$

$$ The discount rate for expanding is

$1$

$4$

$$

$\%$

$$for Farbucks. Given the following projected cash flows for the expansion

$$

$$project$,$ use the domestic NPV approach to determine whether Farbucks should expand to South Korea.

Year

$$

$0$

: initial investment costs of

$9$

$0$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$won per coffee shop

Year

$1$

$$cash

$$

$$flow:

$$

$2$

$0$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

$$won

Year

$2$

$$cash

$$

$$flow:

$$

$3$

$5$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

$$won

Year

$3$

$$cash

$$

$$flow:

$$

$6$

$0$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

$$won

Year

$4$

$$cash

$$

$$flow:

$$

$8$

$5$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

$$won

Year

$5$

$$cash

$$

$$flow:

$$

$3$

$5$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$

$$won

$$

Question content area bottom

Part

$1$

Domestic currency approach in multinational capital budgeting consists of the following

$$

$$steps:

Step

$$

$1$

: Calculate the forward exchange rates.

Step

$$

$2$

: Convert all cash flows in foreign currency into dollars using current and forward exchange rates.

Step

$$

$3$

: Convert all future dollars into present value with the domestic discount rate.

Step

$$

$4$

: Add the net present value of the outflow and inflow.

Step

$$

$5$

: Accept the project if its net present value

$$

$($

NPV

$)$

$$is positive and reject if negative.

Part

$2$

$$

First

$,$

$$complete step

$1$

$$by calculating the forward rates.

$$

$$

The current indirect exchange rate is

$1$

$,$

$0$

$0$

$2$

$$for dollars and South Korean won. The inflation rate in South Korea is expected to hover near

$0$

$.$

$8$

$$

$\%$

$$for the next five years and the U

$.$

S

$.$

$$inflation rate is expected to stay around

$$

$3$

$.$

$4$

$\%$

$.$

$$ What is the

$$

$1$

$-$

year forward indirect rate for dollars and South Korean

$$

$$won$?$ won per $ $(4$ decimals$)$