An Australian company is considering making a foreign capital expenditure in New Zealand. The cost of...

An Australian company is considering making a foreign capital expenditure in New Zealand. The cost of the project is NZD 1m and it is expected to generate cash flows of NZD 350,000, NZD 300,000 and NZD 650,000 over three years.

The inflation rate in New Zealand is 3.2%pa and the inflation rate in Australia is 4.1%pa. The inflation rates are forecasted to be unchanged over the investment horizon.

The firm's cost of capital in Australian dollars is 12.5%. The current exchange rate is S(NZD/AUD)=1.10. Ignore any tax effects (i.e. assume the tax rate is zero).

Convert all cash flows from NZD to AUD at the PPP forecasted exchange rates and estimate the NPV of the project at the AUD cost of capital. Are the two answers identical? If you find any major deviations between the two answers, try to explain the source of these deviations.

(Show all calculation)

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa.

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR10,000. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,000, 4,000, 5,000, 6,000, and 7,000. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The...

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The...

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR12,000. The annual cash flows over the five year economic life of the project in ZAR are estimated to be 3,500; 4,500; 5,500; 6,500; and 7,500. The parent firm’s cost of capital in dollars is 8.5%. Long-run inflation is forecasted to be 3.5% per annum in the U.S. and 7.25% percent in South Africa. The current spot foreign...

The case – Macarony Inc. Macarony Inc. is considering making a capital expenditure for a project...

The case – Macarony Inc. Macarony Inc. is considering making a capital expenditure for a project that would have an eight-year life and require a $2,400,000 investment in equipment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide operating income each year as follows: Sales $3,000,000 Variable expenses 1,800,000 Contribution margin 1,200,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $700,000 Depreciation 300,000 Total fixed expenses...

1. McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost...

1. McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $543,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $74,600. Project B will cost $319,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $45,600. A discount rate of 7% is appropriate for both projects....

Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $480,826,...

Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $480,826, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,600. Project B will cost $317,605, has an expected useful life of 13 years, a salvage value of zero, and is expected to increase net annual cash flows by $49,100. A discount rate of 9% is appropriate for both projects. (Refer...

Sheridan Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $496,000,...

Sheridan Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $496,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $72,400. Project B will cost $335,000, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,000. A discount rate of 8% is appropriate for both projects. Click...

1)McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $489,000,...

1)McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $489,000, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,800. Project B will cost $321,000, has an expected useful life of 11 years, a salvage value of zero, and is expected to increase net annual cash flows by $48,600. A discount rate of 7% is appropriate for both projects. Click...

The most obvious cost in a capital budget is the actual cost of the capital expenditure...

The most obvious cost in a capital budget is the actual cost of the capital expenditure item. We must also consider other costs that will be incurred when we make the capital expenditure (purchase). These costs are important to include because they can be the difference between a successful implementation of the capital expenditure item and staying on budget. After reviewing the textbook readings, provide an example of a healthcare capital expenditure. Explain the rationale behind the purpose of a...

Jonczyk Company is considering two different, mutually exclusive Capital expenditure proposals.

Jonczyk Company is considering two different, mutually exclusive Capital expenditure proposals. Project A will cost $445,000, has an epected useful life of 14 years and a salvage value of zero, and is expected to increase net annual cash flows by $68,000. Project B will cost325,00, has an expected useful life of 14 years and a salvage value of zero, and is expected to increase net annual cash flows by $51,000. A discount rate of 10% is appropriate for both projects. Click...

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows....

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Project Investment Annual Income Life of Project 22A $240,600 $17,220 6 years 23A 271,400 21,000 9 years 24A 284,100 15,700 7 years Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Iggy Company uses the straight-line method of depreciation. Click here to view the factor table. (a) Determine...

Subjects