Question

Americo Corp is considering construction of a manufacturing plant in Turkey. The initial invest will cost 15 millionTurkish Lira (L). The company plans to keep the plant open for 3 years during which cash flows from operations will be 5million, 5million and 4 million Liras respectively at end each of the three years. At end of the third year Americo plans to sell the plant for 10 million liras. Americo’s required rate of return is 15% and the current exchange rate L/$ is 5.75. If the lira is expected to appreciate by 5% per year determine the NPV for this project. Should Americo build this plant? The answer is $764,000. Can you please show step by step how to do this? Thank you!

Answer 1

Since we have to get the final answer in dollars, we need to use the exchange rate appreciation in the NPV formula as well. The NPV equation without the exchange rate will look like:

NPV = -15 + 5/1.15 + 5/1.15^2 + 4/1.15^3 + 10/1.15^3

Now, using the exchange rates in the formula, we will have:

NPV = -15/5.75 + 5/1.15/(5.75/1.05) + 4/(5.75/ (1.05x1.05))/1.15^2 + 14 /(5.75 /(1.05x1.05 x 1.05))/1.15^3 = $618,436.89.

The answer should not be what is mentioned. It should be $618,436.89.

Yes, they should build this project.