Question

A Canadian company is contemplating making a foreign capital expenditure in Morocco in Moroccan dirhams. The initial cost of the project is MAD100,000. The annual cash flows over the 3-year economic life of the project in MAD are estimated to be 33,000, 55,000, and 77,000. The parent firm’s cost of capital in dollars is 10 percent. Long-run inflation is forecasted to be 2 percent per annum in the Canada and 0.5 percent in Morocco. The current spot foreign exchange rate is CAD 1 = MAD 7.30.

Assume that the actual pattern of MAD/USD exchange rates is:

S(0) = 7.3, S(1) = 7.5, S(2) = 7.7, S(3) = 7.2

What is the NPV in dollars?

Select one:

a. $5,239

b. $6,239

c. $4,239

d. $6,239

Answer 1

NPV = sum of present values of cash flows

present value of each cash flow = cash flow / (1 + cost of capital)n

where n = number of years after which the cash flow occurs

The cash flow of each year is converted into CAD at the exchange rate of that year

NPV = $4,239

NPV = $4,239