An American firm is evaluating an investment in Mexico. The project will require

Question

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 $3.7 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $1,700,000 each year in the U.S. and the costs of the project are projected to be 6 million pesos each year for the 5 years. If taxes are 35%, the appropriate discount rate is 9% 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

$1= 12.14 Mexican Pesos

$0.08= 1 Mexican Pesos

NPV IN PESOS>>

Dollars Conversion In Pesos Yearly sale 1,700,000.00 12.14 20,638,000.00 Yearly Sales (a) Yearly Costs (b) Yearly Sales -Yearly Cost (c=a-b) Tax Rate (d) Tax (e=d*c) Net Income (f=c-e) 20,638,000.00 8,000,000.00 12,638,000.00 35% 4,423,300.00 8,214,700.00

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