Question

55. Americo Corp is considering construction of a manufacturing plant in Brazil. The initial investment will cost 14 million Brazilian reals (R). The company plans to keep the plant open for 3 years during which cash flows from operations will be 5million, 5million and 4 million reals respectively at end each of the three years. At end of the third year Americo plans to sell the plant for 10 million reals. Americo’s required rate of return is 15% and the current exchange rate R/$ is 3.87. If the real is expected to depreciate by 5% per year determine the NPV for this project. Should Americo build this plant? Can you please show me step by step how to do this? Thank you!

Answer 1

Step-1 First we calculate the investment value in $

Investment in $ = Initial Investment Cost / Current Exchange Rate = R14 M / 3.87 = $3,617,571.06

Step-2 Now we calculate future exchange rate

	All amount in 'R'
Year	1	2	3
Exchange rate of previous year	3.87	4.06	4.27
Depreciate	5%	5%	5%
Exchange rate in Amount	0.19	0.20	0.21
Exchange Rate of year	4.06	4.27	4.48

(Depreciate Brazilian real mean value of Brazilian real decrease so require to pay real to buy dollar

Step-3 Now we calculate Cash flow in $

Year	1	2	3
Cashflow in Real	R5,000,000	R5,000,000	R4,000,000
Sell of plant	-	-	R10,000,000
Total	R5,000,000	R5,000,000	R14,000,000
Exchange Rate	R4.06	R4.27	R4.48
Cashflow in $	$    1,231,527	$    1,170,960	$    3,125,000

Step-4 Now we Calculate Present Value of Cash flow.

Year	Cashflow	DF @15%	PV
0	$ (3,617,571.06)	1.0000	$ (3,617,571.06)
1	$    1,231,527.09	0.8696	$    1,070,893.12
2	$    1,170,960.19	0.7561	$       885,414.13
3	$    3,125,000.00	0.6575	$    2,054,738.23
Net Present Value	$       393,474.42

NPV of the project is $393,474.42

NPV is positive so Americo should build this plant.