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A) Romanus Company, a U.K. MNC, is contemplating making a foreign capital expenditure in South...

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Finance

A) Romanus Company, a U.K. MNC, is contemplating making a foreign capital expenditure in South KoreaThe initial cost of the project is KRW 22,000. The annual cash flows over the seven year economic life of the project in KRW are estimated to be: 4,000; 5,000; 6,000; 7000; 8,000; 9,000; and, 10,200. The parent firm's cost of capital in pounds is 7.5%. Long-run inflation is forecasted to be 3.5% per annum in the U.K. and 7.5% in South KoreaThe current spot foreign exchange rate is KRW/GBP = 3.75.

What is the NPV in GBP if the actual pattern of KRW/GBP exchange rates are: S(0) = 3.75 S(1) = 5.7 S(2) = 6.7 S(3) = 7.2S(4) = 7.7; S(5) = 8.2 S(6) = 9.2 S(5) = 10.2 B) Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.60/. The one- year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exchange rate.

Assume that you are a euro-based investor, determine the size of the arbitrage profit in euros.

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