Question

Muggers, Inc., is proposing to construct a new plant for mug production in either Brazil or Italy. The forecasted cash flows from the proposed plants over the next four years are as follows:

	2014	2015	2016	2017	2018	IRR (%)
Brazil (millions of Brazilian reals)	-190	+40	+80	+140	+210	35.924
Italy (millions of euros)	-80	+15	+25	+40	+65	22.246

The following information will be necessary to answer the questions:

• The spot exchange for Brazilian reals is R$2.3165 / $1
• The spot exchange for euros is $1.3769 / €1
• The interest rates in the United States, Brazil and Italy are 0.500%, 7.250% and 1.500%, respectively.
• Muggers’ CFO has suggested that, if the cash flows were stated in dollars, a return in excess of 12% would be acceptable.

(a) Assuming interest rate parity holds, calculate the NPV of the Brazilian project in millions of US dollars.        

(b) Assuming interest rate parity holds, calculate the NPV of the Italian project in millions of US dollars.                                                                                        

Answer 1

While calculating the Npv in dollars in both the case, I have first found out the Npv and then used the exchange rate to convert the Npv from Brazilian real or euros to Us dollars.