2. An American firm is evaluating an investment in Mexico. The project will requ
ID: 2802460 • Letter: 2
Question
2. 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
Sales Revenue per year
$ 3,900,000
*Less: Cost per year
$ 306,000
Less: Depreciation
$ 640,000
Gross profit
$ 2,954,000
Less: Tax @35 %
$ 1,033,900
Net profit
$ 1,920,100
Add: Depreciation
$ 640,000
Cash flow per year
$ 2,560,100
Cost per year = 6,000,000 pesos = 0.051 x 6,000,000 = $ 306,000
[1 MXN peso = 0.051 US $]
Year
Cash Flow
Formula For PV Factor
PV Factor @ 10 %
PV
0
$ (3,200,000)
1/(1.1)^0
1
$ (3,200,000.00)
1
$ 2,560,100
1/(1.1)^1
0.909090909
$ 2,327,363.64
2
$ 2,560,100
1/(1.1)^2
0.826446281
$ 2,115,785.12
3
$ 2,560,100
1/(1.1)^3
0.751314801
$ 1,923,441.02
4
$ 2,560,100
1/(1.1)^4
0.683013455
$ 1,748,582.75
5
$ 2,560,100
1/(1.1)^5
0.620921323
$ 1,589,620.68
NPV
$ 6,504,793.21
a)
NPV is $ 6,504,793.21
b)
1 US $ = 19.48 MXN peso
$ 6,504,793.21 = 19.48 x 6,504,793.21 = 126,713,371.70 MXN peso
NPV in Mexican peso is 126,713,371.70 MXN pesos
Sales Revenue per year
$ 3,900,000
*Less: Cost per year
$ 306,000
Less: Depreciation
$ 640,000
Gross profit
$ 2,954,000
Less: Tax @35 %
$ 1,033,900
Net profit
$ 1,920,100
Add: Depreciation
$ 640,000
Cash flow per year
$ 2,560,100
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