Question

Apex, Inc. is a U.S.-based firm investing in a two-year project in Mexico. The present exchange rate is 15 Mexican pesos per U.S. dollar. It is estimated that Mexico’s currency will be devalued in the international market at an average 2.1 % per year relative to the U.S. dollar over the next several years. The estimated before-tax net cash flow (in pesos) of the project is a follows:

                                    End of Year    Net Cash Flow (pesos)

                                                0                      - 900,000

                                                1                         480,000

                                                2                         720,000

If the U.S. company’s MARR is 20 % (before taxes) based on the U.S. dollar, what is the present worth (PW) of the project in terms of U.S. dollars? (Enter your answer as a number without the dollar $ sign.)

Answer 1

Ans. Exchange rate at present, e = 15 Pesos/dollar

Depriciation rate of currency each year, d = 2.1% or 0.021

=> Exchange rate at end of year0, e0 = e*(1+d) = 15.315 pesos/dollar

=> Exchange rate at the end of year 1, e1 = e0*(1+d) = 15.636 Pesos/dollar

=> Exchange rate at the end of year 2, e2 = e1*(1+d) = 15.965 Pesos /dollar

=> Dollar value of cashflow at end of year 0 = 900000/e0 = $58765.916

=> Dollar value of cashflow at the end of year 1 = 480000/e1 = $30697.181

=> Dollar value of cashflow at the end of year 2 = 720000/e2 = $45098.699

Present worth of these dollar cashflows i.e. present value at starting of year 0 at MARR of 20%

PW = -58765.916/(1+ 0.20) + 30697.181/(1+0.20)^2 + 45098.699/(1+0.20)^3

=> PW = -$1555.32

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