Question

Capital Budgeting Example. Brower, Inc. just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanian cedi. Brower intends to leave the plant open for three years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 billion cedi, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per year.

a. Determine the NPV for this project. Should Brower build the plant?

****Please submit your quantitative work in an Excel spreadsheet

Answer 1

		Cash flows (Cedi)	Conversion rate	Cash flows (USD)	Discount factor at 17%	Discounted cash flows
Cost of Palnt	Year 0	-9,000,000,000	8,700.00	-1,034,482.76	1.000000	-1,034,482.76
Operating cash inflows	Year 1	3,000,000,000	9,135.00	328,407.22	0.854701	280,689.98
Operating cash inflows	Year 2	3,000,000,000	9,591.75	312,768.79	0.730514	228,481.98
Operating cash inflows	Year 3	2,000,000,000	10,071.34	198,583.31	0.624371	123,989.66
Sale proceeds of plants	Year 3	5,000,000,000	10,071.34	496,458.27	0.624371	309,974.15
NPV in USD						-91,346.99
Note: Assuming no Taxes & discounted factors are taken from PV tables and rounded to 6 decimals. Conversion rate and cashflows in dollars are rounded to nearest cent.

Brower should not be build the plant as project NPV is in negative.