Question

You are the CEO of an American company considering investing in Brazil. Your BRL cost of capital is 15.8%, and your USD cost of capital is 13.9%. The project you are considering will cost 10M BRL to set up, and will produce free cash flows of 1.4M BRL per year in perpetuity, starting one year from today. Brazil and the US have the same inflation rate, and the current spot exchange rate is USD 0.16 per BRL. What is the NPV of this project (in the appropriate currency) from the parent viewpoint?

Answer 1

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

NPV of the project = PVCI - Initial Investment

PVCI = Free Cash Flow / Discount Rate

Since the investment is in BRL, cost of capital of BRL needs to be considered

i.ePVCI =  1.4 / 15.8% = 8.86 M BRL

hence, NPV = PVCI - Initial Invesmtnet = 8.86 - 10 = - BRL 1.14 Million

NPV of the project in terms of USD currency = -1.14 * 0.16 = - USD 0.18 million