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 $3.2 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $3,900,000 each year in the U.S. and the costs of the project are projected to be 6 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

Solution:-

a) NPV in USD:-

b) NPV in Pesos:-

Initial Investment of Equipment 3200000 Total Outflow 3200000 Sales Revenue per Year 3900000 Less:- Cost in USD as per Current USD Rate 318000 (6000000*0.053) Less:- Depreciation as per Straight Line Method 640000 (3200000/5) Net Profit Before Tax 2942000 Less:- Tax @35% 1029700 Net Profit After tax 1912300 Add:- Depreciation 640000 Net Cash Inflow 2552300 Discounting Factor for 5 Years @10% 3.7907 Present Value of Cash Inflows 9675003.61 NPV 6475003.61

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