Question

Mill Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is
$150,000, and has a terminal value of $20,000. The company's cost of capital is 8%. The project has a
life-time of 3 years. The operating cash flows are as follows:
Year 1 Year 2 Year 3
1. After-tax savings: $35,000 $35,000 $35,000
2. Depreciation tax savings: $22,500 $25,000 $8,000
Net cash flow: $57,500 $55,000 $43,000
(a) Find the net present value of this project (NPV). Should it be accepted?
Suppose Mill Company wishes to expand its operations in the UK. The exchange rate at the time of
investment is £1= $1.60.
(b) Use the PPP to find the exchange rate 1 year from now, 2 years from now and 3 years from now. The
inflation rate in the U.S. (?$) is 3 percent and in the UK 5 percent (?£)
(c) Find the NPV in pounds. Should Mill Company invest in the UK?
(Numbers should be rounded to at least 3 decimal places. Please include currency symbols $, £ in
your answer)

Answer 1

a)

Since the NPV in  £ is negative, if the company raising fund from UK, It will not be Accepted.