Question $1$: Initial Cost in USD

The initial cost of constructing the manufacturing plant in Japan is $110$ million Japanese Yen. Given the current exchange rate is $128$ Yen$/$USD$,$ we can calculate the cost in USD as follows:

Initial Cost $($USD$)=110,000,000$ Yen$128$ Yen$/$USDInitial Cost $($USD$)=128$ Yen$/$USD$110,000,000$ Yen$$

Initial Cost $($USD$)=859,375$ USDInitial Cost $($USD$)=859,375$ USD

Question $2$: NPV of the Project in USD

To calculate the Net Present Value $($NPV$),$ we first need to convert the expected cash flows and the terminal value into USD and then discount them at the required rate of return of $10\%.$

Cash Flows in Yen:

Year $1$: $40$ million Yen

Year $2$: $50$ million Yen

Year $3$: $60$ million Yen

Terminal Value $($Year $3)$: $10$ million Yen

Cash Flows in USD:

Year $1$: $40,000,000$ Yen$128$ Yen$/$USD$=312,500$ USD$128$ Yen$/$USD$40,000,000$ Yen$=312,500$ USD

Year $2$: $50,000,000$ Yen$128$ Yen$/$USD$=390,625$ USD$128$ Yen$/$USD$50,000,000$ Yen$=390,625$ USD

Year $3$: $60,000,000$ Yen$128$ Yen$/$USD$=468,750$ USD$128$ Yen$/$USD$60,000,000$ Yen$=468,750$ USD

Terminal Value $($Year $3)$: $10,000,000$ Yen$128$ Yen$/$USD$=78,125$ USD$128$ Yen$/$USD$10,000,000$ Yen$=78,125$ USD

Discounted Cash Flows:

Year $1$: $312,500(1+0\mathrm{.}10)1=284,091$ USDYear $1$: $(1+0\mathrm{.}10)1312,500=284,091$ USD

Year $2$: $390,625(1+0\mathrm{.}10)2=322,314$ USDYear $2$: $(1+0\mathrm{.}10)2390,625=322,314$ USD

Year $3$: $468,750(1+0\mathrm{.}10)3=351,479$ USDYear $3$: $(1+0\mathrm{.}10)3468,750=351,479$ USD

Terminal Value $($Year $3)$: $78,125(1+0\mathrm{.}10)3=58,741$ USDTerminal Value $($Year $3)$: $(1+0\mathrm{.}10)378,125=58,741$ USD

NPV Calculation:

NPV$=859,375+284,091+322,314+351,479+58,741$NPV$=859,375+284,091+322,314+351,479+58,741$

NPV$=157,250$ USDNPV$=157,250$ USD

Question $3$: NPV with Blocked Funds

Assuming funds are blocked and can only be remitted at the end of Year $3,$ and the funds are reinvested in Japan at $4\%$ interest rate:

Reinvested Cash Flows:

Year $1$: $40,000,000\backslash$times $(1+0\mathrm{.}04)2=43,264,000$ Yen$40,000,000\backslash$times $(1+0\mathrm{.}04)2=43,264,000$ Yen

Year $2$: $50,000,000\backslash$times $(1+0\mathrm{.}04)1=52,000,000$ Yen$50,000,000\backslash$times $(1+0\mathrm{.}04)1=52,000,000$ Yen

Year $3$: $60,000,000$ Yen$60,000,000$ Yen

Total Cash Flows in Yen at Year $3$:

$43,264,000+52,000,000+60,000,000+10,000,000=165,264,000$ Yen$43,264,000+52,000,000+60,000,000+10,000,000=165,264,000$ Yen

Total Cash Flows in USD at Year $3$:

$165,264,000$ Yen$128$ Yen$/$USD$=1,291,125$ USD$128$ Yen$/$USD$165,264,000$ Yen$=1,291,125$ USD

Discounted Cash Flows:

NPV with blocked funds$=1,291,125(1+0\mathrm{.}10)3$NPV with blocked funds$=(1+0\mathrm{.}10)31,291,125$

NPV with blocked funds$=970,725$ USDNPV with blocked funds$=970,725$ USD

Question $4$: NPV of the Project with Blocked Funds

The NPV of this international project considering blocked funds will be:

NPV$=859,375+970,725$NPV$=859,375+970,725$

NPV$=111,350$ USDNPV$=111,350$ USD

Question $5$: Expected Exchange Rate in Year $3$

Using the Purchasing Power Parity $($PPP$),$ the expected exchange rate can be calculated as:

Expected Exchange Rate$=$Current Exchange Rate$\backslash$times $(1+\backslash$pi Yen$1+\backslash$pi USD$)$tExpected Exchange Rate$=$Current Exchange Rate$\backslash$times $(1+\backslash$pi USD$1+\backslash$pi Yen$)$t

Expected Exchange Rate$=128\backslash$times $(1+0\mathrm{.}031+0\mathrm{.}05)3$Expected Exchange Rate$=128\backslash$times $(1+0\mathrm{.}051+0\mathrm{.}03)3$

Expected Exchange Rate$=128\backslash$times $(1\mathrm{.}031\mathrm{.}05)3$Expected Exchange Rate$=128\backslash$times $(1\mathrm{.}051\mathrm{.}03)3$

Expected Exchange Rate$=128\backslash$times $(0\mathrm{.}980952)3$Expected Exchange Rate$=128\backslash$times $(0\mathrm{.}980952)3$

Expected Exchange Rate$=128\backslash$times $0\mathrm{.}94276$Expected Exchange Rate$=128\backslash$times $0\mathrm{.}94276$

Expected Exchange Rate$=120\mathrm{.}67$ Yen$/$USDExpected Exchange Rate$=120\mathrm{.}67$ Yen$/$USD

Question $6$: Foreign Currency Required Rate of Return for Yen

Using the International Fisher Effect $($IFE$)$:

$1+$rYen$=(1+$rUSD$)\backslash$times $(1+\backslash$pi Yen$1+\backslash$pi USD$)1+$rYen$=(1+$rUSD$)\backslash$times $(1+\backslash$pi USD$1+\backslash$pi Yen$)$

$1+$rYen$=(1+0\mathrm{.}10)\backslash$times $(1\mathrm{.}031\mathrm{.}05)1+$rYen$=(1+0\mathrm{.}10)\backslash$times $(1\mathrm{.}051\mathrm{.}03)$

$1+$rYen$=1\mathrm{.}10\backslash$times $0\mathrm{.}9809521+$rYen$=1\mathrm{.}10\backslash$times $0\mathrm{.}980952$

$1+$rYen$=1\mathrm{.}0780471+$rYen$=1\mathrm{.}078047$

rYen$=0\mathrm{.}078047$rYen$=0\mathrm{.}078047$

rYen$=7\mathrm{.}80\%$rYen$=7\mathrm{.}80\%$

Summary of Answers

The initial cost will be about $$859,375.$

The NPV of this new project will be about $$157,250.$

The net present value of parent cash flows in year $3$ will be about $$970,725.$

The net present value of this international project will be a

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