Question

Misrilou 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, Misrilou 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

Solution:

After tax cash flows for 4 years = MYR 33 million

Sale value at the end of 4 years = MYR 11 million

WACC = 16.5%

Present value of cash inflows = MYR 33 million * Cumulative PV factor at 16.50% for 4 periods + MYR 11 million * PV Factor at 16.5% for 4th peirod

= 33 million * 2.770481 + 11 million * 0.542871

= MYR 97.3974 million

Initial investment in USD = $25 million

Therefore 4 years average minimum value of the mayasian ringgit in USD neceeasy to warrant acceptance of the project = $25 / 97.3974 = $0.25668