uYour company is looking at a new project in Mexico. The project will cost 9 million...

uYour company is looking at a new project in Mexico. The project will cost 9 million pesos. The cash flows are expected to be 2.25 million pesos per year for 5 years. The current spot exchange rate is 9.08 pesos per Canadian dollar. The risk-free rate in the Canada is 4% and the risk-free rate in Mexico 8%. The dollar required return is 15%.

uShould the company make the investment?

Expert Solution


	Present Value(PV) of Cash Flow=(Cash flow)/((1+i)^N)
	i=discount rate=required return=15%=0.15
	N=Year of cash flow
	Current exchange rate : 1 dollar=9.08 Pesos
	Interest rate in Canda=4%=0.04
	Interest rate in Mexico=8%=0.08
	Exchange Rate in year 0: 1 dollar=	9.08	Pesos
	Exchange Rate in year 1: 1dollar=9.08*(1.08/1.04)	9.43	Pesos
	Exchange Rate in year 2=9.43*(1.08/1.04)	9.79	Pesos
	Exchange Rate in year 3=9.79*(1.08/1.04)	10.17	Pesos
	Exchange Rate in year 4=10.17*(1.08/1.04)	10.56	Pesos
	Exchange Rate in year 5=10.56*(1.08/1.04)	10.97	Pesos

N	Year	0	1	2	3	4	5
A	Initial investment (Pesos)	(9,000,000)
B	Expected annual cash inflows(Pesos)		2,250,000	2,250,000	2,250,000	2,250,000	2,250,000
C=A+B	Net Cash Flows in Pesos	(9,000,000)	2,250,000	2,250,000	2,250,000	2,250,000	2,250,000
D	Exchange Rate (Pesos/Canadian Dollar)	9.08	9.43	9.79	10.17	10.56	10.97
CF=C/D	Cash Flow in Canadian Dollars	-$991,189	$238,620	$229,782	$221,271	$213,076	$205,185	SUM
PV=CF/(1.15^N)	Present Value of Cash Flow	-$991,189	$207,495	$173,748	$145,490	$121,827	$102,013	-$240,616
NPV=Sum of PV	Net Present Value of Cash Flows	-$240,616
	No, The Company should not make the investment
	Net Present Value is NEGATIVE
	The return generated is less than 15%

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