Read the hypothetical case below and answer the questions that follow.

Lexington Corp., a U.S. firm, currently has no existing business in New Zealand but is considering establishing a subsidiary to serve the local market there. The following information has been gathered to assess this project.

• The initialinvestment required is 20 million New Zealand dollars (NZ$).
• The projectwill be terminated at the end of year 5, when the subsidiary will be sold.
• The current spot rate of the New Zealand dollar is quoted as: NZD-USD = 0.5923 and for now it is assumed to remain constant until the end of the project.
• The after-tax earningsof the subsidiary are estimatedto be NZ$3,500,000; NZ$4,750,000; NZ$5,900,000; NZ$7,000,000 and NZ$8,250,000 at the end of years one, two, three, four, and five respectively.
• The New Zealand government will impose a withholding tax of 10 percent on remitted earnings by the subsidiary.
• All cash flows received by the subsidiary are to be sent to the parentat the end of each year.
• The salvage value to be received is NZ$5 million.
• Lexingtonrequires an 12% rate of return on this project.

Questions:

1. Calculate the net presentvalue of this project. Should Lexington acceptthis project?
2. Suppose that the New Zealand dollar appreciated continuously against the U.S. dollar by 2% annually until the end of year 5. What will be the effect on Lexington projects NPV? Comment on your results. What could be done toface this possible scenario?
3. Go back to the original scenario again, but now assume that funds are blocked until the subsidiary is sold and funds are reinvested at a rate of 5% annually until they are remitted by the end of Year 5. Show how the projectsNPV is affected. Comment on your answer.