1. Lean Silver Co. (KLS), a US based firm is considering entering into an agreement to build a gold mine in Romania. The current exchange rate is $0.1675 to one Leu. The initial investment required is RON 15,000,000, which includes payments to the government for mineral rights. KLS expects to receive RON 3,000,000 in cash flows in year one (after taxes), growing commiserate with Romanian inflation. KLS expects that Romanian inflation will average 6.5% per year and US inflation is expected to be 0% inflation per year. KLS has calculated a 9% cost of capital (in terms of USD) for mining projects in Romania. However, the 9% discount rate does not incorporate any risk of expropriation. KGC has estimated a 6% probability of being expropriated in any given year. Is this project worth undertaking?

K=[(1+r)/(1-p)] -1

r is the firms WACC, p denotes the probability of expropriation.