Question

An Opal is considering establishing a two‑year project in New Zealand with a $30 million initial investment. The firm’s cost of capital is .12. The required rate of return on this project is 0.13. The project is expected to generate cash flows of NZ$10,700,000 in Year 1 and NZ$29,700,000 in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $0.59 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value in New Zealand dollars?

Answer 1

Initial investment	30,000,000.00	$
1NZ $	0.59	$
Initial investment in NZ $	50,847,457.63	NZ $
Cost of capital	12%
Required rate of project	13%
Let breakeven Salvage value be X

	Project	1.13
	a	b	a*b
Year	Cashflow	PV factor 13% [1/(1+r)]^n	PV
0	(50,847,457.63)	1.000	(50,847,457.63)
1	10,700,000.00	0.885	9,469,500.00
2	29,700,000.00	0.783	23,255,100.00
	Total		(18,122,857.63)

NPV without considering salvage value is -18122857.63
Breakeven salvage value means the value of salvage when NPV is 0
i.e 0.783X -18118974.58 = 0
x=	23,145,412.04	NZ $
i.e breakeven Salvage value	23,145,412.04	NZ $

Proof

	Project	1.13
	a	b	a*b
Year	Cashflow	PV factor 13% [1/(1+r)]^n	PV
0	(50,847,457.63)	1.000	(50,847,457.63)
1	10,700,000.00	0.885	9,469,500.00
2	52,845,412.04	0.783	41,377,957.63
	NPV of project		0.00

Notes:

Salvage value is adjusted with last year cash outflow

NPV = Discounted inflow - Initial investment