Question

3. Your company is contemplating on investing in a manufacturing facility in China. 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 2018-2023 and that the cash flows will grow at a constant rate starting 2024.

Year FCF Other Data
2018 -50,000,000 RMB Growth rate of RMB FCF starting 2024 = 2%

2019 6,000,000 RMB Cost of Capital for similar U.S. Projects (WACC) = 12%

2020 7,000,000 RMB Inflation in the U.S. = 1%

2021 8,000,000 RMB Inflation in Chine 5%

2022 9,000,000 RMB Spot rate = 6.5 RMB/USD

2023 . 10,000,0000 RMB

a) What is the appropriate discount rate you should use to discount the RMB cash flows?

b) 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.)

c) What is the USD NPV for this project? (Please show your calculation converting RMB NPV to USD NPV.)

d) What are the i) RMB cost of capital, and ii) RMB NPV if inflation in China rises to 7% and the U.S. inflation rises to 2%?

Answer 1

2023 . 10,000,0000 RMB  all calculation in the question has been made on given data that is highlighted above. Although it seems to some typo mistake , ( as big number ). The below calculted IRR become big due to this ,

Answer a) Concept of interest rate ;

Real Interest rate = Interest rate - Inflation :

; for US , WACC = 12% , Real interest rate = 12 -1 = 11%

For RMB , Interest rate = Real Interest rate + Inflation = 11 +5 = 16% ( discounting rate in RMB)

NPV for perpetual cash inflow with growth (g) = cash inflow ( 1+g) / r -g

Answer B)

RMB Calculation
	2018	2019	2020	2021	2022	2023		2024
Cash flow	(50,000,000)	6,000,000	7,000,000	8,000,000	9,000,000	100,000,000		102,000,000
PV (cash flow)		5172413.793	5202140.309	5125261.388	4970619.881	47611301.54
Discounting rate	16%
Growth rate	2%
NPV(till 2023)	18,081,737
NPV(perpetual Flow)	728571428.6
NPV	746,653,165
IRR	219.9%

Answer c)

US$ Calculation ( 1 USD = 6.5 RMB)
	2018	2019	2020	2021	2022	2023		2024
Cash flow	(7,692,308)	923,077	1,076,923	1,230,769	1,384,615	15,384,615		15,692,307
PV (cash flow)		824,176	858,516	876,037	879,948	8,729,644
Discounting rate	12.00%
Growth rate	2%
NPV(till 2023)	4,476,013
NPV(perpetual Flow)	156923073
NPV	161,399,086
IRR	219.9%

Answer d) (i) RMB cost of capital = Real rate + Inflation = 11 + 7 = 18%

(II) US$ Cost of capital = Real rate + inflation = 11 + 2 = 13%

NPV is USD with the rise of inflation = $146,677,650

NPV is RMB with the rise of Inflation = RMB 650,834,105