When a manufacturing company decides to build a plant in a foreign country, the company is...

When a manufacturing company decides to build a plant in a foreign country, the company is often able to get regions of the country to compete for the jobs that will be brought to the area. The governments and municipalities of these regions will often offer subsidies in the form of below-market rate financing. Consider this hypothetical example. You are evaluating a project based in Zimbabwe. Currently Zimbabwe does NOT have their own currency and the USD is used for all payments. The project will generate $15M after-tax cashflows per year for 10 years (Y1-Y10). Your cost of capital (WACC) is 10%, the cost of debt is 5%, and the tax rate is 20%. The project requires an initial investment of $50M in Year 0. You are planning to fund the project with $20m equity and 30M debt (the debt must be repaid in 10 equal installments). The Zimbabwean government is offering to lend you $30M at 3% (the loan must be repaid in 10 equal installments). Compute the NPV of the project. (hint: carefully consider the tax shield implications). Please include a table with all relevant cashflows and describe your calculations in detail.

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Expert Solution

Total present value of all future cash flows

add all present values from year 1 to 10 = 89.392595mn

Out flow = 50mn

NPV = 89.39 - 50 = 39.39mn (approx)

jeff jeffy answered 1 year ago

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