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 $2.2 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $1,900,000 each year in the U.S. and the costs of the project are projected to be 5 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 Mexican Peso equals

0.057 US Dollar

Intial investment 2200000 Sales 1900000 Cost Of goods sold =5*1000000*0.057 285000 Depreciation 440000 Income Before tax 1175000 Tax 411250 Net Income 763750 Add depreciation 440000 Cash flow from operation 1203750

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