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Xomo, a U. S.- based firm, is proposing a project in a developing country. The project’s after- tax cash flows in the foreign currency are as follows:
Year After- Tax Cash Flows
1 250
2 350
3 450
The initial investment in the project is USD 1,100. The spot rate for the foreign currency is USD 1.60. The appropriate discount rate for foreign currency cash flows is 18 percent. Assume that the foreign government forces the firm to place all cash flows in a bank account earning 3 percent until the end of the project. Consider the following additional information. Interest rates in the United States and foreign country (annual compounding) basis are 5 percent and 8 percent, respectively. Assuming that parity conditions hold, estimate domestic currency cash flows and NPV to the parent under the blocked scenario.
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