The New Orleans Exporting Co. produces small computer components, which are then

Question

The New Orleans Exporting Co. produces small computer components, which are then sold to Mexico. It plans to expand by establishing a plant in Mexico that will produce the components and sell them locally. This plant will reduce the amount of goods that are transported from New Orleans. The firm has determined that the cash flows to be earned in Mexico would yield a positive net present value after accounting for tax and exchange rate effects, converting cash flows to dollars, and discounting them at the proper discount rate. What other major factor must be considered to estimate the project's Net Present Value? Why?

Explanation / Answer

New Orleans Exporting Co. must account for the cash flows that will be forgone as a

result of the plant because some of the cash flows that used to be received by the parent

through its exporting operation will be eliminated. The NPV estimate will be reduced

after this factor is accounted for.

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