Question

AP 5 // 30 PONTS POSSIBLE WUV Corp is considering a project in Malaysia that is projected to produce after-tax cash flows of MYR 33 million for 4 years. In addition, WUV believes it will be able to sell the project to a Malaysian competitor for MYR 11 million at the end of 4 years. The project will be funded with US-supplied financing in the amount of USD 25 million at a weighted average cost of capital of 16.5%. What is the 4-year average MINIMUM value of the Malaysian Ringgit in USD necessary to warrant acceptance of the project?

Answer 1

Step-1 Assume exchange rate is 'x'

Step-2 Calculate the cashflow statement by using the 'x' exchange rate.

Step-3 Calculate NPV of project by using cashflow statement calculated above.

Step-4 To accept project NPV should be equal to '0' or higher means positive, So by using NPV calculated above find out value of 'x'.

Step-1 We assume exchange rate is 'x'

Step-2

Calculation of Cashflow
Year	0	1	2	3	4
Cashflow after tax	-	MYR 33,000,000	MYR 33,000,000	MYR 33,000,000	MYR 33,000,000
Add : Salvage of old machine	-	-	-	-	MYR 11,000,000
Net Cashflow	-	MYR 33,000,000	MYR 33,000,000	MYR 33,000,000	MYR 44,000,000
Exchange rate	x	x	x	x	x
Cashflow in $		33000000x	33000000x	33000000x	44000000x
Less : Initial outflow	$25,000,000	-	-	-	-
Net Cashflow	($25,000,000)	33000000x	33000000x	33000000x	44000000x

Step-3

Calculation of NPV
Year	Cashflow	DF @16.5%	P.V.
0	($25,000,000)	1.0000	($25,000,000)
1	33000000x	0.8584	28327200x
2	33000000x	0.7368	24314400x
3	33000000x	0.6324	20869200x
4	44000000x	0.5429	23887600x
Net Present Value	97398400x - $25,000,000

Step-4

97398400x - $25,000,000 = 0

97398400x = $25,000,000

x = 0.256678 or say 0.2567

So 4-year average rate of 1 MYR = 0.2567 $ to accept the project.