4. An American firm is evaluating an investment in Mexico. The project will requ
ID: 2647774 • Letter: 4
Question
4. An American firm is evaluating an investment in Mexico. The project will require purchasing equipment from a variety of sources and shipping it to Mexico. The projected cost of buying the equipment and shipping it is $7.6 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $3,900,000 each year in the U.S. and the costs of the project are projected to be 10 million pesos each year for the 5 years. If taxes are 35%, the appropriate discount rate is 10% and you use the current exchange rate for pesos:
(a) Calculate the NPV in U.S. dollars. (Show all calculations and ignore working capital)
(b) Calculate the NPV in Mexican pesos. (Show all calculations and ignore working capital)
Explanation / Answer
Using Current Exchange Rate : 1 Us Dollar = 15.32 Mexican pesos
(a) Calculate the NPV in U.S. dollars. (Show all calculations and ignore working capital)
Initial Investment = $ 7,600,000
Annual Sale = 3,900,000
Annual Cost = 10 Million Pesos = 10/15.32 = $ 652,741.51
Annual Depreciation = 7600000/5 = $ 1,520,000
Net Income before tax = $ 1,727,258.49
Tax Expenses = 35%*1727258.49 = $ 604,540.47
Net Income = $ 1,122,718.02
Add: Depreciation = 1520000
Annual Cash Flow = $ 2,642,718.02
NPV = - Initial Investment + Annual Cash Flow * PVIFA(rate,nper)
NPV = -7600000 + 2642718.02*PVIFA(10%,5)
NPV = -7600000 + 2642718.02*3.790787
NPV = $ 2,417,981.11
(b) Calculate the NPV in Mexican pesos. (Show all calculations and ignore working capital)
Initial Investment = $ 7,600,000 * 15.32 = 116,432,000 Pesos
Annual Sale = 3,900,000 * 15.32 = 59,748,000 Pesos
Annual Cost = 10,000,000 Pesos
Annual Depreciation = 116,432,000/5 = 23,286,400 Pesos
Net Income before tax = 26,461,600 Pesos
Tax Expenses = 35%*26461600 = 9261560 Pesos
Net Income = 17,200,040 Pesos
Add: Depreciation = 23,286,400 Pesos
Annual Cash Flow = 40,486,440 Pesos
NPV = - Initial Investment + Annual Cash Flow * PVIFA(rate,nper)
NPV = -116,432,000 + 40,486,440*PVIFA(10%,5)
NPV = -116,432,000 + 40,486,440*3.790787
NPV = 37,043,470.43 Pesos
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