Question

Caterpillar is considering building a production facility in Argentina. The plan is to fund have of the initial capital outlay by borrowing funds in Argentina and using funds from the parent company’s equity. Caterpillar will assess the project from the parent’s perspective to determine the project’s cash flows and if the project has a positive NPV and should be pursued. Why would the cash flows in the Argentina project be different than the same project in Illinois? Why would the initial outlay be different (Or would it be?)

Answer 1

Net Present Value Method:-

The net present value (NPV) strategy ascertains the normal monetary profit or misfortune from an undertaking by reducing all normal future money inflows and surges back to the present point in time utilizing the required rate of return. Just undertakings with a positive NPV are worthy in light of the fact that the arrival from these activities surpasses the cost of capital (the arrival accessible by contributing the capital somewhere else).

Net present Value is computed by isolating the normal salary of an undertaking in every future year by a term equivalent to one in addition to a markdown rate raised to a power equivalent to the year. The aggregates for every year at that point are included, and the underlying expense of the task is subtracted from that total to touch base at the net present esteem. The markdown rate speaks to the time estimation of cash: the sum that could be profited to different chances.

Positive Net Present Value – The motivation behind net present Value is to encourage examiners and administrators choose whether or not new activities are monetarily suitable. Basically, net present value estimates the aggregate sum of gain or misfortune an undertaking will create contrasted with the sum that could be earned essentially by sparing the cash in a bank or putting it in some other open door that produces an arrival equivalent to the rebate rate. On the off chance that a long haul venture has a positive net present value, at that point it is relied upon to deliver more salary than what could be picked up by winning the markdown rate, which implies the organization ought to proceed with the undertaking.