The South Korean multinational manufacturing firm, Nan Sung Industries

is debating whether to invest in a 2-year project in the United States. The project’s expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 13%. The current exchange rate is 1,050 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:

1-year 2-year
USA 4.0% 4.25%
S. Korea 3.0% 3.25%

a) If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return of this project?
b) What is the expected forward exchange rate 1 year from now and 2 years from now?
c) If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Nam Sung?

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