Bluesky is based in Australia and reports in Australian Dollars (AUD). It plans to build a green energy powered steel mill in Indonesia with project cash flows denominated in Indonesian Rupiah (IDR). The spot exchange rate is currently AUD/IDR 1.6. The upfront (t=0) capital investment required is 420 IDR. The project’s annual after-tax cash flows are expected to be 120 IDR per year for 25 years (t=1 to 25). The after-tax salvage value of the equipment in 25 years (t=25) is expected to be 150 IDR. The after-tax clean up and decommissioning costs in 25 years (t=25) are expected to be 270 IDR. The after-tax weighted average cost of capital used for similar projects in Australia is 11.0 percent per annum. The risk-free interest rate in Australia is currently 3.0 percent per annum. The risk-free interest rate in Indonesia is currently 6.0 percent per annum. 1. What is the appropriate after-tax weighted average cost of capital that Bluesky should use on project cash flows denominated in Indonesian Rupiah (IDR) to calculate an NPV also denominated in Indonesian Rupiah (IDR)? 2. Calculate the Net Present Value of the project in Indonesian Rupiah (IDR)? 3. Calculate the Net Present Value of the project in Australian Dollar (AUD)? 4. A work colleague studied Corporate Finance as part of their MBA but did not study Advanced Finance. They incorrectly convert all of the project’s expected future cash flows at the current spot exchange rate and then discounts the cash flows using the company’s standard domestic after-tax weighted average cost of capital. What is the Net Present Value that they would be expected to calculate using their incorrect method?
Added by Karen N.
Step 1
The appropriate after-tax weighted average cost of capital (WACC) that Bluesky should use on project cash flows denominated in Indonesian Rupiah (IDR) to calculate an NPV also denominated in Indonesian Rupiah (IDR) can be calculated using the International Fisher Show more…
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