Taiwan Semiconductor (TSM) is considering a 2-year project in the U.S. The proje

Question

Taiwan Semiconductor (TSM) is considering a 2-year project in the U.S. The project's expected dollar cash flows consist of an initial investment of $100,000 with cash flows of $70,000 in year 1 and $60,000 in year 2. The risk-adjusted cost of capital for the project is 20%. The current exchange rate is NT$30=$1. Risk-free interest rates in the U.S. and Taiwan are:

U.S.

1-year: 4.0%

2-year: 7%

Taiwan:

1-year: 3%

2-year: 5%

What is the NPV of the project?

Note: During the calculations, the rounding of the numbers may impact the final answer. So select the closest answer.

Select one:

a. $12,532.86

b. -$63,166.67

c. -$52,900.77

d. $45,655.09

e. $23,090.74

Explanation / Answer

1. Initial investement = 100000x $NT30 = $NT3000000

2. Exchange rate after 1 year:

NT$30=$1

NT$30(1.03) = $1(1.04)

NT$29.71 = $1

Exchange rate after 2 years:

NT$29.71 = $1

NT$29.71(1.05) = $1(1.07)

NT$29.15 = $1

3. Cash flow after 1 year = 70000 x 29.71 = $NT2079700

4. Cash flow after 2 years = 60000 x 29.15 = $NT1749000

5. NPV = [2079700 x 0.833] + [1749000 x 0.694] - 3000000

NPV = $NT-53803.90

This answer is close to option c. Hence NPV is $52.900.77

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