XYZ Corporation, an Australian based carmaker, is considering anexpansion into Asia after its expansion into the US last summer washighly successful. Currently, XYZ does export cars to Asia, but theincreased demand raises the question of an expansion in Asia. XYZis trying to decide whether to establish a car manufacturing plantand office in Japan where cars would be built and then sold acrossAsia.

All relevant data is given in the tables below. The cost of theexpansion is Yen 80,000,000, which must be immediately expended.Three-year EBITDA are 35,000,000 45,000,000 and 55,000,000respectively. Moreover, XYZ would have to fund additional workingcapital of Yen 5,000,000 at the time of the expansion. Furtherinvestment in net working capital would be Yen 5,000,000, Yen8,000,000, and Yen 10,000,000 in year 1, 2, and 3 respectively. Ifit builds the plant, XYZ will depreciate it at a rate of Yen4,000,000 per year (starting in year 1) and will have to fundadditional capital expenditures of Yen 8,000,000 per year tomaintain and improve the plant. Although the project is assumed tohave an infinite life, cash-flows are only projected up to threeyears and the terminal value of the project is computed based onthe year 3 free cash-flow (FCF) assuming a growth rate that equalsthe Japanese long-run GDP growth rate.

All taxes are paid in Japan in the year the income is earned.Tax treaties are in effect so that XYZ will have no tax obligationsto the Australian Tax Office (ATO). The following informationapplies to the valuation.

	Japan	Australia
Price Inflation	2.00%	3.00%
Annual return on government bonds	3.00%	4.00%
Corporate tax rate	40.00%	30.00%
Equity market risk premium AUD		6.00%
Spot rate-S(AUD/Yen)	0.01
Before tax cost of debt		5.00%
Debt-to-value ratio (D/V)		0.5
Systematic risk (beta)		1.2
Japanese long-run GDP growth rate	3%
WACC	12.80%

Required:

1. Calculate the cost of capital, in Australia, for the project.  
2. Calculate the forward exchange rates, F₁(AUD/Yen)through F₃(AUD/Yen), for the years 1, 2, and 3 based onthe spot rate and the interest rates given in the question. (roundto 5 decimal places)   
3. Calculate the Free of Cash Flows of the project in Yen fromyear 1 to year 3.   
4. What is the terminal value as of year 3? Use aperpetuity formula, the Free Cash Flows in Yen for year 3, and theJapanese growth rate assumption given in the question. Assume theappropriate discount rate isWACC.                             
5. Calculate the AUD value of FCF for the years 0, 1, 2 and 3 andthe terminal value   using the forward rates calculatedin (b).
6. What is the NPV of the project from XYZ's perceptive (in AUD)?Should XYZ expand into the Asian market?