Question

Americo Corp is considering construction of a manufacturing plant in Turkey. The initial invest will cost 15 million Turkish Lira (L). The company plans to keep the plant open for 3 years during which cash flows from operations will be 5million, 5million and 4 million Liras respectively at end each of the three years. At end of the third year Americo plans to sell the plant for 10 million liras. Americo’s required rate of return is 15% and the current exchange rate L/$ is 5.75. If the lira is expected to appreciate by 5% per year determine the NPV for this project. Should Americo build this plant?

Answer 1

Solution :-

Exchange rate now = 1 $ = 5.75 Lira

Exchange rate one year from now = 1$ = 5.75 * ( 1 - 0.05 ) = 5.4625 Lira

Exchange rate next year = 1$ = 5.4625 * ( 1 - 0.05 ) = 5.1894 Lira

Exchange rate next year = 1$ = 5.1894 * ( 1 - 0.05 ) = 4.93 Lira

Therefore NPV of Project = $783,016.46

As the NPV is Positive, greater than Equal to Zero Americo should build this plant

If there is any doubt please ask in comments

Thank you please rate