Binko is building a manufacturing plant in Taiwan at a cost of $10 million. The
ID: 2764780 • Letter: B
Question
Binko is building a manufacturing plant in Taiwan at a cost of $10 million. The project will last 5 years and the following cash flows (in Taiwanese dollars) are projected: Year 1: 64.3 million, Year 2: 71.2 million, Year 3: 93.6 million, Year 4: 121.8 million, Year 5: 109.6 million. The company usually uses a discount rate of 7.5 percent for domestic projects but is adding a 2.5 percent country risk premium for this project. The current spot exchange rate is 32.03 TWD/$. The risk free rate in the United States is currently 2.5 percent, and the risk free rate in Taiwan is currently 6 percent. The projected interest rates for the next four years are shown below. What is the NPV of the project?
1 year
2 years
3 years
4 years
5 years
U. S. interest rate
2.5
2.5
2.6
2.7
2.7
Taiwan interest rate
6.9
6.7
6.4
6.2
6.2
1 year
2 years
3 years
4 years
5 years
U. S. interest rate
2.5
2.5
2.6
2.7
2.7
Taiwan interest rate
6.9
6.7
6.4
6.2
6.2
Explanation / Answer
CALCULATION OF NPV (Amount in Million dollars)
________________________________________________________________________________________
YEAR CASH FLOWS(TWD) EXCHANGE RATE NET CASH FLOWS (US$) PV @10% PV OF CF
0 320.30 30.03 -10.000 1 (10.000)
1 64.3 30.71 2.093 0.909 1.901
2 71.2 30.76 2.314 0.826 1.911
3 93.6 30.89 3.030 0.751 2.276
4 121.8 30.97 3.933 0.683 2.069
5 109.6 30.97 3.539 0.621 2.198
NET PRESENT VALUE $ 0.355
Decsion : Since NPV is positive, project may be accepted.
Year 0 32.03 spot rate
Year 1 32.03 + 1+0.025/1+0.069 = 30.71
year 2 32.03 + 1.025/1.067 = 30.76
Year 3 32.03 + 1.026/1.064 = 30.89
Year 4 32.03 + 1.027/1.062 = 30.77
Year 5 32.03 + 1.027/1.062 = 30.77
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