Question

Your company is looking at a new project in Mexico. The project will cost 900,000 pesos. The cash flows are expected to be 400,000 pesos per year for 5 years. The current spot exchange rate is 19.07 pesos per dollar. The risk-free rate in the US is 4%, and the risk-free rate in Mexico 8%. The dollar required return is 10%. What is the net present value of this investment in U.S. Dollars?

PLEASE SHOW IN EXCEL

Answer 1

Exchange Rate over 5 years:

1 USD = 19.07 Pesos

Exchange Rate after 1 Year = 19.07 * 1.08 / 1.04

= 19.80

Exchange Rate after 2 Year = 19.80 * 1.08 / 1.04

= 20.57

Exchange Rate after 3 Year = 20.57 * 1.08 / 1.04

= 21.36

Exchange Rate after 4 Year = 21.36 * 1.08 / 1.04

= 22.18

Exchange Rate after 5 Year = 22.18 * 1.08 / 1.04

= 23.03

FWd rate = Spot rate * [ 1 + Int Rate in Mexico ] / [ 1 + Int rate in US ]

NPV = PV of Cash Inflows - PV of Cash Outflows.

Year	CF	Exchange Rate	CF in Dollar	PVF @10%	Disc CF
0	-900000	19.07	$ -47,194.55	1.0000	$ -47,194.55
1	400000	19.8	$   20,202.02	0.9091	$ 18,365.47
2	400000	20.57	$   19,445.79	0.8264	$ 16,070.90
3	400000	21.36	$   18,726.59	0.7513	$ 14,069.57
4	400000	22.18	$   18,034.27	0.6830	$ 12,317.65
5	400000	23.03	$   17,368.65	0.6209	$ 10,784.56
NPV					$ 24,413.61