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Please answer the two questions below and show the work. Thanks.

1. United Technologies Inc. (UT) just constructed a manufacturing plant in China. The construction cost 9 billion Chinese Yuan. UT intends to leave the plant open for three years. During the three years of operation, Yuan cash flows are expected to be 3 billion Yuan, 3 billion Yuan, and 2 billion Yuan, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, UT expects to sell the plant for 5 billion Yuan. UT has a required rate of return of 17 percent. It currently takes 2.75 Yuan to buy one U.S. dollar, and the Yuan is expected to depreciate by 7 percent per year.

a. Determine the NPV for this project. Should United Technologies build the plant?
b. How would your answer change if the value of the Yuan was expected to remain unchanged from its current value of 2.75 Yuan per U.S. dollar over the course of the three years? Should United Technologies construct the plant then? The NPV would therefore be $¬¬______.
c. Recall that Yuan 5 billion of the cash flow in year 3 represents the salvage value. United Technologies is not completely certain that the salvage value will be this amount and wishes to determine the NPV without this amount in the capital budgeting exercise. The NPV would therefore be $_______.

2. As of today, assume the following information is available:

U.S. Mexico
Real rate of interest required by investors 2% 2%
Nominal interest rate 11% 15%
Spot rate —- $.20
One-year forward rate —- $.19

a. Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.
b. Use the forward rate to forecast the percentage change in the Mexican peso over the next year.

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