An American firm is evaluating an investment in Mexico. The project will require
ID: 2670847 • Letter: A
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 $3.6 million. Once the project begins operations, it is expected to last for 6 years. Expected sales are $1,700,000 each year in the U.S. and the costs of the project are projected to be 10 million pesos each year for the 6 years. If taxes are 35%, the appropriate discount rate is 11% and you use the current exchange rate for pesos, $1 = 13.45 pesos.Explanation / Answer
See table below. NPV is ($931,677). I'm assuming you already know the present value formula, if not then let me know.
Final cash inflow for every year is equal to Sales - Cost - Tax (where Taxes = 35% x (Sales - Cost)).
YEAR
Outflow
Sales
Cost
Tax
Inflow (Sales – Cost – Tax)
Present Value
0
$3,600,000
($3,6000,000)
1
0
$1,700,000
$743,494
$334,777
$630,729
$568,224
2
0
$1,700,000
$743,494
$334,777
$630,729
$511,914
3
0
$1,700,000
$743,494
$334,777
$630,729
$461,184
4
0
$1,700,000
$743,494
$334,777
$630,729
$415,481
5
0
$1,700,000
$743,494
$334,777
$630,729
$374,307
6
0
$1,700,000
$743,494
$334,777
$630,729
$337,213
TOTAL
-$931,677
YEAR
Outflow
Sales
Cost
Tax
Inflow (Sales – Cost – Tax)
Present Value
0
$3,600,000
($3,6000,000)
1
0
$1,700,000
$743,494
$334,777
$630,729
$568,224
2
0
$1,700,000
$743,494
$334,777
$630,729
$511,914
3
0
$1,700,000
$743,494
$334,777
$630,729
$461,184
4
0
$1,700,000
$743,494
$334,777
$630,729
$415,481
5
0
$1,700,000
$743,494
$334,777
$630,729
$374,307
6
0
$1,700,000
$743,494
$334,777
$630,729
$337,213
TOTAL
-$931,677
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