Question

Aviva (USA) is considering opening a factory in Hungary. The following data are given.

1. The initial investment is 2.5 Billion Forint.
2. Current exchange rate (F/$) = 2150. The spot rate is expected to move according to relative PPP between the U.S. and Hungary. U.S. and Hungarian inflation rates are expected to average 5 and 15 percent per year respectively over the investment period.
3. Remittable operating cash flows in local currency are estimated to be as follows:

t	Cash flow (in millions)
1	300
2	375
3	450
4	600
5	720

      The applicable discount rate is 17%

4. Lost sales from existing operation will cost Aviva an average of $50,000 per year. The applicable discount rate is 17%
5. The project will generate a net-of-tax depreciation allowance of $120,000 per year for five years (Appropriate discount rate is 12%)
6. Extra tax benefits of $15,000 per year can be generated with an applicable discount rate of 15%.
7. At the end of the five year project life the nominal salvage value (in local currency) is expected to be 20% of the original cost in local currency (appropriate discount rate is 18%).

The part I am stuck on the most is how to get the CF($)

Answer 1

Answer:

Initial investment in Dollar		$            (1,162,791)
PV of annual cash inflows		$                  515,000
PV value of lost sale		$                (159,967)
Present value of net-of-tax depreciation allowance		$                  432,573
PV of Extra tax benefits		$                     50,282
PV of Salvage Value		$                     64,502
Net present value		$                (260,401)
Aviva (USA) should not open the factory in Hungary.

Calculation:

Event A
Initial investment in Forint	2,500,000,000
Initial investment in Dollar (2500000000/2150)	$              1,162,791

Event D
PV value of lost sale @17% for 5 years (50000*3.1993462)			$         159,967

Event E , F &G
Period	PV factor @ 12%	PV factor @ 15%	PV factor @ 18%
After year 1	0.8928571	0.8695652	0.847458
After year 2	0.7971939	0.7561437	0.718184
After year 3	0.7117802	0.6575162	0.608631
After year 4	0.6355181	0.5717532	0.515789
After year 5	0.5674269	0.4971767	0.437100
Total	3.6047762	3.3521551

Present value of net-of-tax depreciation allowance @ 12% (120000*3.6047762)			$         432,573
PV of Extra tax benefits @ 15% (15000*3.3521551)			$           50,282
Salvage value in local currency (2500000000*20%)			500,000,000
Salvage value in dollar (500000000/3388.29462)			$         147,567
PV of Salvage Value (147567*0.43710)			$           64,502