Sacramone Products Co. is a U.S.-based firm evaluating a project in Mexico You h

Question

Sacramone Products Co. is a U.S.-based firm evaluating a project in Mexico You have the following information about the project: The project requires a 170,000 peso investment today and is expected to generate cash flows of 64,500 pesos at the end of the next three years. The current U.S. exchange rate with the Mexican peso is 12.012 pesos per U.S. dollar, and the exchange rate is expected to remain constant The firm's cost of capital is 9.5%, and the project is of average risk. . What is the dollar-denominated net present value (NPV) of this project? O -$544.49 O -$680.61 O -$714.64 O -$816.73 When companies evaluate project investment in foreign nations, they also have to consider the additional risk that foreign projects are exposed to compared to domestic projects, such as exchange rate risk and political risk. Expropriation is one such risk where the government of a country takes away a private business from its owners without appropriately compensating the owners. Which of the following actions should companies take to prevent expropriation? Check all that apply Structure the operations of the subsidiary such that the subsidiary derives much of its value only via its relationship or integration with the parent company. Repatriate the maximum amount of cash from the subsidiary to the foreign government. Finance the subsidiary with local capital. Use transfer pricing so that the subsidiary company pays maximum taxes to the foreign government.

Explanation / Answer

Statement showing NPV in pesos

Exchange rate :1$=12.012 pesos
?$= -8175.51 pesos

=-8175.51/12.012

=-$680.61

one should structure operations of the subsidiary such that the subsidiary derieves much of its value only via it's relation ship with parent company and if possible it is better to finance subsidiary with local capital to prevent expropriation

Year Cash flow PVIF @ 9.5% Present value 0 -170000 1.0000 -170000.000 1 64500 0.9132 58904.110 2 64500 0.8340 53793.707 3 64500 0.7617 49126.673 NPV -8175.510

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