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You are the CEO of an American company considering investing in Brazil. Your BRL cost of...

You are the CEO of an American company considering investing in Brazil. Your BRL cost of capital is 15.6%, and your USD cost of capital is 13%. The project you are considering will cost 49M BRL to set up, and will produce free cash flows of 1.6M 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 0.2 per BRL. What is the NPV of this project (in the appropriate currency) from the project viewpoint?

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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 = PVCI - Initial Investment

PVCI = Free Cash Flow / Discount Rate

Since , investment is in BRL, cost of BRL needs to be used of 15.6%

PVCI = 1.6/ 15.6% = BRL 10.2564 million

NPV = PVCI - Initial Investment = 10.2564 - 49 = - BRL 38.7435 million (Negative NPV)

We need to find the NPV from project viewpoint which is - BRL 38.7435 million

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