Question

80. Zimmer, a manufacturer of modular rooms, plans to expand its operation in Landshut, Germany. The expansion will cost $14.5 million and is expected to generate annual net cash flows of DM4.5 million for a period of 12 years and then the operation will be sold for DM2 million. The cost of capital for the project is 14%. Using the spot exchange rate of $0.60 per DM, compute the NPV of this expansion project.

       a.    $0.78 million

       b.    $1.03 million

       c.    $2.58 million

       d.    $11.39 million

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

Annual Net cash flow in terms of $ is computed as follows:

= DM 4.5 million x $ 0.60

= $ 2.7 million

Selling value in terms of $ is computed as follows:

= DM 2 million x $ 0.60

= $ 1.20 million

So, the NPV is computed as follows:

= - $ 14.5 million + $ 2.7 million / 1.14¹ + $ 2.7 million / 1.14² + $ 2.7 million / 1.14³ + $ 2.7 million / 1.14⁴ + $ 2.7 million / 1.14⁵ + $ 2.7 million / 1.14⁶ + $ 2.7 million / 1.14⁷ + $ 2.7 million / 1.14⁸ + $ 2.7 million / 1.14⁹ + $ 2.7 million / 1.14¹⁰ + $ 2.7 million / 1.14¹¹ + $ 2.7 million / 1.14¹² + $ 1.20 million / 1.14¹²  

= $ 1.03 million Approximately

So, the correct answer is option b.

Feel free to ask in case of any query relating to this question