Question

An BVD 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 0.16. The project is expected to generate cash flows of NZ$11,600,000 in Year 1 and NZ$31,100,000 in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $0.53 per NZ$ 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 capital	30,000,000.00	$
1 NZ $	$0.53
Initial capital in NZ $	56,603,773.58	NZ $
Cost of capital	12%
Required rate	16%
Cash inflows
1st year	11,600,000.00	NZ $
2nd year	31,100,000.00	NZ $
Salvage	?
	a	b	a*b
Year	Cashflow (NZ $)	PV factor 16% [1/(1+r)]^n	PV
0	(56,603,773.58)	1.000	(56,603,773.58)
1	11,600,000.00	0.862	10,000,000.00
2	31,100,000.00	0.743	23,112,366.23
	NPV without considering Salvage		(23,491,407.35)
Breakeven salvage value means, Salvage value when NPV is 0
	(Salvage value * 0.743) - 23491407.35 = 0
	Breakeven salvage value		31,610,037.74	NZ $