Alpha Inc. is contemplating on investing in a manufacturing facility in China. As a consultant, you...

Alpha Inc. is contemplating on investing in a manufacturing facility in China. As a consultant, you are charged with doing the financial analysis for this project. You expect the cash flows (in Chinese RMB) for this project to last indefinitely. You estimated the following cash flows for 2019-2024 and that the cash flows will grow at a constant rate starting 2025. (12 points)

Year	FCF	Other Data
2019	-80,000,000 RMB	Growth rate of RMB FCF starting 2025 = 3%
2020	9,000,000 RMB	Cost of Capital for similar U.S. Projects (WACC) = 15%
2021	10,000,000 RMB	Inflation in the U.S. = 2%
2022 2023 2024	12,000,000 RMB 16,000,000 RMB 20,000,000 RMB	Inflation in China = 6% Spot rate = 6.5 RMB/USD

What is the appropriate discount rate you should use to discount the RMB cash flows?
What is the RMB NPV and IRR for this project? (If Excel is used, please cut and paste it here, showing all the cash flows and answers to this question.)
What is the USD NPV for this project? (Please show your calculation converting RMB NPV to USD NPV
What are the i) RMB cost of capital and ii) RMB NPV if inflation in China rises to 7% and the U.S. inflation drops to 1%

Please attach your spreadsheet

Solutions

Expert Solution

discount rate to use = US WACC * (1 + China inflation) / (1 + US inflation)

discount rate to use = 15% * (1 + 6%) / (1 + 2%) = 15.6%

Horizon value at 2025 = 2025 FCF / (discount rate - growth rate from 2025)

Horizon value at 2025 = (RMB 20,000,000 * 1.03) / (0.1560 - 0.03) = RMB 163,492,063

NPV and IRR are calculated as below :

To calculate the USD NPV, the cash flows are to be converted from RMB to USD

The exchange rate in any year is calculated using purchasing power parity. The RMB will depreciate against USD at a rate equal to the inflation differential

RMB cost of capital = 15% * (1 + 7%) / (1 + 1%) = 15.89%

jeff jeffy answered 1 month ago

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