An MNC is considering establishing a two- year project in West Germany with Euro

Question

An MNC is considering establishing a two- year project in West Germany with Euro 30 million initial investment. The required rate of return on this project is 18%. The project is expected to generate cash flows of Euro 15 million in year 1 and Euro 20 million in year 2 value. Assume no taxes. Exchange rate of $1.15/Euro. All cash flow are remitted to the parent. What is the break-even salvage value (in $)? An MNC is considering establishing a two- year project in West Germany with Euro 30 million initial investment. The required rate of return on this project is 18%. The project is expected to generate cash flows of Euro 15 million in year 1 and Euro 20 million in year 2 value. Assume no taxes. Exchange rate of $1.15/Euro. All cash flow are remitted to the parent. What is the break-even salvage value (in $)?

Explanation / Answer

At Breakeven ,NPV = 0 ,So,Present value of cash inflow = Initial investment

Initial investment= (PVF@18%,1*CF1)+(PVF@18%,2*CF2)+(PVF@18%,2 *Salvage)

   30   = (.84746 * 15)+(.71818* 20)+( .71818 *sv)

30 = 12.7119+ 14.3636+ .71818 SV

30 - 12.7119 - 14.3636 = .71818 SV

   2.9245 = .71818 SV

   SV = 2.9245 /.71818 = Euro 4.0721

Salvage value in $ = 4.0721 *1.15 = $ 4.6829

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