Questions 1 - 6 are based on the following information: B A US multinational corporation has...

Questions 1 - 6 are based on the following information: B A US multinational corporation has operations in Bolivia through which it plans to sell a new product of 500,000 cans of beans per year for the next 3 years, at a price of BOB 4 per can after incurring a variable cost of BOB 2.50 per can. The company will also incur a fixed cost of $120,000 per year. The company has invested $900,000 today in manufacturing equipment for its Bolivian operations, which will be depreciated to $0 at the end of its 3-year life. The corporation's required rate of return is 20 % and has a tax rate of 25 %. The spot rate was BOB 6.91/$ before it unexpectedly changed to BOB 7.25/$. 1. What is the value of the Bolivian operations prior to the unexpected change in the spot rate assuming the operations have a 3-year life only? (round to the nearest dollar) A). US$237,699 B). US$166,903 C). US$107,453 D). US$159,076 E). None of the above

Expert Solution

The corporation's required rate of return is 20 %. We will need the PVIFA (Present Value Annuity Factor) at 20% for 3 years. Looking up this value from a PVIFA table we get 2.1065 (rounded off to the 4th decimal).

The spot rate was BOB 6.91/$.

Below are the calculations for the Annual Cash Flows after Tax and Value of the Bolivian operations.

Since the Fixed Cost per year and Depreciation per year are given in US$, we have to calculate Total Contribution in BOB, convert that into US$ at the spot rate of BOB 6.91/$, and then proceed further. All calculations are explained in the worksheet itself.

Hence, Value of the Bolivian operations prior to the unexpected change in the spot rate = US$ -24,144 (rounded to nearest dollar)

Answer : E) None of the above

Note : We can make the mistake of wrongly arriving at option B : 166,903 as the answer, if by mistake we take the total contribution as BOB 750,000 instead of converting it, then deduct fixed cost and depreciation in US$, perform the usual calculations, and finally convert the Present value of annual cash flows arrived at into US$.

jeff jeffy answered 1 month ago

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