Question

Brower, Inc. just constructed a manufacturing plant in Ghana. You are given the following information:
The construction cost  (in billion Ghanian cedi):	11
Brower intends to leave the plant open for three years. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. During the three years of operation, cedi operating cash flows are expected as follows:
Year	CF
1	4
2	5
3	4
At the end of the third year, Brower expects to sell the plant for (in billion cedi):	7
The required rate of return of Brower:	0.19
Current exchange (cedi/$):	87000
Cedi is expected to depreciated by 5 per cent per year. What is the NPV of the project? Choose the best (nearest) answer.

Question 96 options:

	A) $8,756
	B) $11,984
	C) $4,332
	D) -$2,590

Answer 1

Solution :

The Net presnet value of the project is = $ 11,984

Thus the solution is Option B. $ 11,984

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

Notes :

1. Calculation of Exchange rate for Years 1 to 3:

As per the information given in the question

Current exchange rate between the US Dollar and Ghanian Cedi = cedi / $ = 87,000 cedi

This implies 1 US Dollar = 87,000 Cedi

Further,

As per the information given in the question

Each year the cedi is expected to depreciate by 5 %

Thus the exchange rate of Year 1 = Year 0 exchange rate * ( 1 + Percentage of depreciation )

= 87,000 * ( 1 + 0.05 ) = $ 87,000 * 1.05 = $ 91,350

Similarly the exchange rate for Year 2 and Year 3 will be as follows :

Exchange rate Year 2 = Year 1 exchange rate * ( 1 + Percentage of depreciation )

= 91,350 * ( 1 + 0.05 ) = $ 91,350 * 1.05 = $ 95,917.5000

Exchange rate Year 3 = Year 2 exchange rate * ( 1 + Percentage of depreciation )

= 95,917.500 * ( 1 + 0.05 ) = $ 95,917.50 * 1.05 = $ 100,713.3750

Conversion of Cash flows from Ghanian Cedi to US Dollars:

Year 0 : Cash outflow for construction of Plant = 11,000,000,000.00 cedi

Exchange rate in Year 0 is 1 US Dollar = 87,000 cedi

Thus the cash outflow in Year 0 in terms of US Dollar = 11,000,000,000.00 cedi / 87,000

= $ 126,436.7816

Year 1 : Operating Cash Inflow Year 1 = 4,000,000,000.00 cedi

Exchange rate in Year 1 is 1 US Dollar = 91,350 cedi

Thus the cash outflow in Year 0 in terms of US Dollar = 4,000,000,000.00 cedi / 91,350

= $ 43,787.6300

Cash inflows for Years 2 & 3 can be calculated as explained above.