(Solved) A professional accountancy institute in the UK is evaluating an investment project overseas in Eastasia, a politically stable country. The project involves the establishment of a training school to offer courses on international accounting and management topics. It will cost an initial 2.5 million Eastasian dollars (EA$) and it is expected to earn post-tax cash flows as follows:

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The following information is available:

 The expected inflation rate in Eastasia is 3 per cent a year.

 Real interest rates in the two countries are the same. They are expected to remain the same for the period of the project.

 The current spot rate is EA$2 per £1 sterling.

 The risk-free rate of interest in Eastasia is 7 per cent and in the UK 9 per cent.

 The company requires a sterling return from this project of 16 per cent. (CIMA)

Required

Calculate the sterling net present value of the project using both the following methods:

(i) by discounting annual cash flows in sterling,

(ii) by discounting annual cash flows in Eastasian $.

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