Question

Your company is contemplating on investing in a manufacturing facility in China. You are charged with doing the financial analysis for this project. You expect the cash flows (in Chinese RMB) for this project to last indefinitely. You estimated the following cash flows for 2019-2024 and that the cash flows will grow at a constant rate starting 2025

Year	FCF	Other Data
2019	-50,000,000 RMB	Growth rate of RMB FCF starting 2025 = 2%
2020	6,000,000 RMB	Cost of Capital for similar U.S. Projects (WACC) = 12%
2021	7,000,000 RMB	Inflation in the U.S. = 1%
2022 2023 2024	8,000,000 RMB 9,000,000 RMB 10,000,000 RMB	Inflation in China = 5% Spot rate = 6.5 RMB/USD

1. What is the appropriate discount rate you should use to discount the RMB cash flows?
2. What is the RMB NPV and IRR for this project?
3. What is the USD NPV for this project?
4. What are the i) RMB cost of capital, and ii) RMB NPV if inflation in China rises to 7% and the U.S. inflation rises to 2%?

Answer 1

a) Appropriate Discount rate = WACC for US projects + Inflation differential between China and US = 12%+(5%-1%) = 12% +4%

= 16%

b) ,c) and d) Given in excel below

calculations