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

Question

4. 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 $4.2 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $2,900,000 each year in the U.S. and the costs of the project are projected to be 7 million pesos each year for the 5 years. If taxes are 35%, the appropriate discount rate is 10% 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

(a) For calculating the NPV in US Dollars 1 USD = 16.945 Pesos $ $ Initial Investment 4200000 Sales per year 2900000 Costs per year (7 million pesos = 413101 Depreciation per year 840000 1646899 Tax Impact @ 35% 576414.7 Net Income per year 1070484 Discount Rate 10% Given this information, the NPV of the Project in USD comes to -1,29,112.20 -$ 129,112.20 (b) For calculating the NPV in Mexican Pesos 1 USD = 16.945 Pesos Pesos Pesos Initial Investment 71169000 Sales per year 49140500 Costs per year 7000000 Depreciation per year 14233800 27906700 Tax Impact @ 35% 9767345 Net Income per year 18139355 Discount Rate 10% Given this information, the NPV of the Project in Pesos comes to -21,87,793.69 - Pesos 2,187,793.69

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.