Question

7. International capital budgeting

One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies.

Consider this case:

Sacramone Products Co. is a U.S.-based firm evaluating a project in Mexico.

You have the following information about the project:

•	The project requires a 130,000 peso investment today and is expected to generate cash flows of 61,500 pesos at the end of the next three years.
•	The current U.S. exchange rate with the Mexican peso is 10.946 pesos per U.S. dollar, and the exchange rate is expected to remain constant.
•	The firm’s WACC is 9%, and the project is of average risk.

What is the dollar-denominated net present value (NPV) of this project?

$2,580.13

$2,345.57

$2,697.41

$2,228.29

Answer 1

Solution )

WACC is used as the discount rate in order to calculate the present value , i= 9% or 0.09

Present value of Cash inflow = 61500 ( 1/(1+i)) + 61500 ( 1/(1+i)²) +61500 ( 1/(1+i)³)

Present value of Cash inflow = 61500 (1/1.09) + 61500 (1/(1.09)²) + 61500 ( 1/(1.09)³)

= 61500 (0.9174) + 61500 (0.8422) + 61500 (0.7722)

= 155674.609 peso

Present value of Cash outflow = 130000 peso

Net present value = Present value of cash inflow – present value of cash out flow

= 155674.609- 130000                          

= 25674.609 peso

Converting pesos into US dollar

10.946 pesos = $1

25674.609 / 10.946

WACC is used as the discount rate in order to calculate the present value , i= 9% or 0.09

Present value of Cash inflow = 61500 ( 1/(1+i)) + 61500 ( 1/(1+i)²) +61500 ( 1/(1+i)³)

Present value of Cash inflow = 61500 (1/1.09) + 61500 (1/(1.09)²) + 61500 ( 1/(1.09)³)

= 61500 (0.9174) + 61500 (0.8422) + 61500 (0.7722)

= 155674.609 peso

Present value of Cash outflow = 130000 peso

Net present value = Present value of cash inflow – present value of cash out flow

= 155674.609- 130000                          

= 25674.609 peso

Converting pesos into US dollar

10.946 pesos = $1

25674.609 / 10.946

NPV of the project = $2345.5699 or $2345.57 (Approximate) (Answer), So option B is the right answer