Kevin after graduating has started working in a Turkish company as a project man
ID: 2602998 • Letter: K
Question
Kevin after graduating has started working in a Turkish company as a project manager. After making the initial contacts he has found out that there is a possibility for establishing a high-tech project in Tunisia. The estimated cash flow of this project in Tunisian Dinar is shown in the following table. The Turkish company that Kevin is working for requires a 10% rate of return in Turkish Liras. Should Kevin approve the project based on a present worth analysis in Turkish Liras, if the devaluation of the Tunisian Dinar relative to the Turkish Lira is estimated to be 12% per year and the present exchange rate is 1 TL = 0.62 Tunisian Dinar?
End of Year
Cash Flow (in Tunisian Dinars)
0
-3.600.000
1
450.000
2
1.500.000
3
1.500.000
4
1.500.000
5
1.500.000
6
1.500.000
7
1.500.000
End of Year
Cash Flow (in Tunisian Dinars)
0
-3.600.000
1
450.000
2
1.500.000
3
1.500.000
4
1.500.000
5
1.500.000
6
1.500.000
7
1.500.000
Explanation / Answer
End of Year Cash Flow (in Tunisian Dinars) Conversion Factor Cash Flow (in Turkish Lira) x PVF at 10% PV 0 (3,600,000) ÷ 0.62 (5,806,451.61) x 1 (5,806,451.61) 1 450,000 ÷ 0.62(1.12)^1 648,041.47 x 0.909091 589,128.61 2 1,500,000 ÷ 0.62(1.12)^2 1,928,694.87 x 0.826446 1,593,962.70 3 1,500,000 ÷ 0.62(1.12)^3 1,722,048.99 x 0.751315 1,293,800.89 4 1,500,000 ÷ 0.62(1.12)^4 1,537,543.74 x 0.683013 1,050,163.06 5 1,500,000 ÷ 0.62(1.12)^5 1,372,806.91 x 0.620921 852,405.08 6 1,500,000 ÷ 0.62(1.12)^6 1,225,720.45 x 0.564474 691,887.24 7 1,500,000 ÷ 0.62(1.12)^7 1,094,393.26 x 0.513158 561,596.79 NPV = Sum Total 0 to 7 = TL 826,492.76 Yes, it has positive NPV of TL826,492.76, kevin should approve the project.
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