1. Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian 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 15 percent. It currently takes 8,800 cedi to buy 1 U.S. dollar, and the cedi is expected to depreciate by 6 percent per year.
a. Determine the NPV for this project. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign.
Should Brower build the plant? YES or NO
b. Determine the NPV if the value of the cedi was expected to remain unchanged from its current value of 8,800 cedi per U.S. dollar over the course of the three years? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign.
Should Brower build the plant? YES or NO
Brower build the plant.
Solution
a.
Year 0
Year 1
Year 2
Year 3
Investment, billion cedi
−9
Operating CF, billion cedi
3
3
2
Salvage Value, billion cedi
5
Net CF, billion cedi
−9
3
3
7
Exchange rate of $, cedi
8,800.00
9,328.00
9,887.68
10,480.94
Cash flows to parent
−$1,022,727.27
$321,612.35
$303,407.88
$667,878.98
PV of parent cash flows
−$1,022,727.27
$279,662.91
$229,419.95
$439,141.27
NPV
−$1,022,727.27
−$743,064.36
−$513,644.41
−$74,503.15
Since the project has a negative net present value (NPV), Brower should not undertake it.
b.
Year 0
Year 1
Year 2
Year 3
Investment, billion cedi
−9
Operating CF, billion cedi
3
3
2
Salvage Value, billion cedi
5
Net CF, billion cedi
−9
3
3
7
Exchange rate of $, cedi
8,800
8,800
8,800
8,800
Cash flows to parent
−$1,022,727.27
$340,909.09
$340,909.09
$795,454.55
PV of parent cash flows
−$1,022,727.27
$296,442.69
$257,776.25
$523,024.28
NPV
−$1,022,727.27
−$726,284.58
−$468,508.33
$54,515.94
If the value of the cedi remains constant, the NPV is positive. Thus, Brower should undertake the project in this case.
Note: While the calculations above show values rounded to the nearest cent, unrounded values should be used in your calculations.