Pepper Corp. is an Australian dog toy producer specializing in kangaroo-shaped dog toys. It is looking to set up operations in New Zealand. The investment is expected to produce after-tax New Zealand dollars (NZD) cash flows (in billions) as follows:

Year 0: -NZD5.3

Year 1: NZD13.1

Year 2: NZD13.7

Year 3: NZD15.8

Year 4: NZD15.3

 The corporate tax rate is 30% in Australia and in New Zealand. The risk-free rate is 1.3% in Australia and is 4% in New Zealand. Inflation is 3.9% in Australia and is 5.9% in New Zealand.

The current spot NZD/AUD exchange rate in 0.88 NZD/AUD. The required rate of return for this type of project is 2.4% in Australia and 3.3% in New Zealand.  Suppose that 50% of the funds are blocked in New Zealand where they earn no return, until one year after the project finishes. 

If PPP holds, what is the NPV of the project in AUD?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project in AUD we need to discount the cash flows in N... View the full answer