Xomo, a U. S.- based firm, is proposing a project in a developing country. The p

Question

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 all cash flows are repatriated when earned. What is the project NPV?

Explanation / Answer

Calculationof Net Present Value NPV = Cash Inflows ( PVAF. 3 years) - Cash Outflows NPV = 250*.847+350*.718+450*.609-1100 NPV = 211.75+251.3+274.05-1100 = -362.9 NPV = -362.9*1.6 = -$ 580.64

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