International Foods Corporation, a U.S.-based food company, is considering expanding its soup-processing operations in Switzerland. The company plans a net investment of $7 million in the project. The current spot exchange rate is SF5.5 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF3 million for 7 years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 19 percent. Calculate the net present value of the proposed expansion project. Use Table IV to answer the questions below. Enter your answer in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answer to two decimal places.
Homework Answers
| International Foods Corporation | |||
| NPV calculation of expansion Project | |||
| Current exchange rate for SF :USD=5.5:1 | |||
| Net annual Cash flow from Project | SF 3 Million | ||
| Net annual Cash flow from Project in USD=3/5.5= | USD 0.545 Miliion | ||
| NPV Calculation | a. | b. | |
| Particulars | Amt $ Million | PV Factor / PVIFA @19% for 7 years | PV of Cash flow=a*b |
| Initial Investment | (7.00) | 1 | (7.00) |
| Net Annual Cash flow from Year 1 to 7 | 0.545 | 3.706 | 2.02 |
| Total | (4.98) | ||
| So , NPV of the project is $(4.98) Million |
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