Question

Calculation of Domestic Cash Flows and NPV. Romig Enterprises, a U.S.-based firm, is considering a project in China to produce and sell compressors. It is a four-year project with an initial investment of USD 500,000. Each year, it would produce 800 units of the product at a direct cost of CNY 600 and sales price of CNY 2,000. Indirect expenses, not including depreciation, are expected to be CNY 120,000. Depreciation is straight line to zero. Taxes are 30 percent. Calculate USD cash flows and the NPV assuming a USD discount rate of 10 percent The current spot rate is USDCNY = 6.50. Assume that currency values do not change during the life of the project, salvage is zero, and no working capital requirement exists.

Answer 1

Sales = 2000 × 800 units = 1,600,000 CNY

Direct cost = 600 × 800units = 480,000 CNY

Indirect cost = 120,000 CNY

Ebitda = sales - direct cost - indirect cost

= 1,600,000 - 480,000 - 120,000

= 1,000,000 CNY

Convert CNY to USD

Ebitda = 1,000,000 / 6.50 = 153,846.15 USD

Depreciation = 500,000 / 4 = 125,000 USD

EBT = EBITDA - depreciation

= 153,846.15 - 125,000 = 28,846.15

Taxes = 28,846.15 × 30%

= 8,653.8450

Net profit = 28,846.15 - 8,653.8450

= 20,192.3050

Incremental cash flow (1 to 4 years)= net profit + depreciation

= 20,192.3050 + 125,000

= 145,192.3050

Using financial calculator to calculate Npv

Inputs: C0 = -500,000

C1 = 145,192.3050. Frequency = 4

I = 10%

Npv = compute

We get, NPV = - $39,759.93