4. Foreign project valuation Frank F.X. Gong, chief economist for China at J.P.

Question

4. Foreign project valuation Frank F.X. Gong, chief economist for China at J.P. Morgan has forecast that the Yuan will rise to 7.74 Yuan/S by the end of 2005 and to 7.2 Yuan/S by the end of 2006. If the after-tax cashflows generated by the two-year, U.S. based project are $12 billion at the end of 2005 and $14 billion at the end of 2006, and the Chinese cost of capital is 15%, what is the NPV of this project in Yuan? Hint: Convert dollar cashflows into yuan cashflows and then calculate the NPV] (9 points)

Explanation / Answer

Value eo of investment = $12 million.

Exchnage rate in 2005 = 7.74 yuan

Investment value in Yuan = $12 × 7.74

= 92.88 billion Yuan.

After one year cash inflow = $14 billion.

Exchnage rate after one year = 7.20 Yuan Per dollar.

Cash flow after one year in Yuan = $14 × 7.20 yuan

= 100.8 billion Yuan

Net present value = (100.8 / 1.15) - $92.88

= 87.65 Yuan - 92.88 Yuan

= -5.23 billion.

NPV o fproject is -5.23 billion yuan.

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