Question

Redy Tody, an Indian-based pharmaceutical firm, is considering a project in Canada. The following table lists foreign currency (CAD) cash flows. The CAD is currently trading at equals INR30/CAD. Assume that future spot rates are equal to the current spot rate. The WACC of the firm (in INR) is 16 percent.

• Calculate the project cash flows in INR, and determine the NPV.
  • Year                          Cash Flows (CAD)                     Cash Flows (INR)@INR30/CAD
  •    0                                      -120,000                                         ?
  • 1-3                                       40,000                                                ?
  • 4                                          90,000                                               ?

Answer 1

Solution

Calculation of Cash flows in INR

Year	Cash Flows (CAD)	Cash Flows (INR)
0	-120,000	-120,000*30=-3600,000
1-3	40,000	40,000*30=1200,000
4	90,000	90,000*30=2700,000

Computation of NPV

NPV=Present value of cash inflows-Cash outflows at year 0

Discounting rate=16% or 0.16

Present value of cash inflows

=1200,000/(1+0.16)^1+1200,000/(1+0.16)^2+1200,000/(1+0.16)^3+2700,000/(1+0.16)^4

=103,4482.76+891,795.48+768,789.21+1491,185.96

=INR 4186,253.41

Net Present Value(NPV)=INR 4186,253.41-INR 3600,000

=INR 586,253.41