Question

1.) Roming Enterprises, a U.S- based firm, is considering a project in China to produce and sell compressors. It is a four-year project with an initial investment of USD 500,000. Each year, it would produce 800 units of the product at a direct cost of CNY 600 and sales price of CNY 2,000. Indirect expenses, not including depreciation, are expected to be CNY 120,000. Depreciation is straight line to zero. Taxes are 30 percent. Calculate USD cash flows and the NVP assuming a USD discount rate of 10 percent. The current spot rate is USDCNY = 6.50. Assume that currency values do not change during the life of the project, salvage is zero, and no working capital requirement exists.

2.)

4. A project in Hong Kong costs Hong Kong dollar (HKD) 100,000 and produces cash flows of HKD 40,000 per year for four years. Gruner, a Swiss firm using Swiss franc (CHF), is interested in adopting this project. If this had been a domestic project, the discount rate would have been 14 percent, Forecasts of inflation rates over the next four years indicate inflation of 2.5 percent in Switzerland and 5 percent in Hong Kong. Spot CHFHKD is 6.2 a. What is the appropriate discount rate for HKD cash flows? Using this discount rate, calculate the project NPV in HKD. b. Making appropriate assumptions and using data given in the problem, forecast future values of CHFHKD. c. Estimate CHF cash flows, and calculate the project NPV in CHF. Are HKD and CHF project NPVs different?

Answer 1

Year 0 free Cash flow  
Initial Investment at year 0 is USD    -500000
Cash flow from Year 1-4 in CNY  
Annual revenue(800*2000)   1600000
less: direct cost (800*600)   -480000
less : other cost   -120000
less: Depreciation.   -125000
(500000/4)  
___________________________  
Operating profit   875000
less tax @ 30%.   -262500
___________________________  
Profit after tax.   612500
Add: Depreciation   125000
___________________________  
Free cash flow .   737500
___________________________  
  
Note : Depreciation is non cash expenditure. it is only deducted for tax purposes. as it is not a cash outflow, it will be added back.  
  
Discount rate=   10%
years (n)=   4
Present value of Cash inflows = Annual amount * (1-(1/(1+r)^n) / r  
737500*(1-(1/(1+10%)^4))/10%  
2337775.767  
  
Today exchnage rate 1USD= 6.5 CNY  
So PV in USD = 2337775.767/6.50  
359657.8103  
  
NpV = Sum of PV of cash flows  
-500000+359657.81  
-140342.1897  
  
NPV is negative. So project is not acceptable  
  
  

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