7. International capital budgeting One of the important components of multinational capital budgeting is to analyze the...

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Accounting

7. International capital budgeting
One of the important components of multinational capitalbudgeting is to analyze the cash flows generated from subsidiarycompanies.
Consider this case:
Sacramone Products Co. is a U.S.-based firm evaluating a projectin Mexico.
You have the following information about the project:
• The project requires a 130,000 peso investment today and isexpected to generate cash flows of 61,500 pesos at the end of thenext three years.
• The current U.S. exchange rate with the Mexican peso is 10.946pesos per U.S. dollar, and the exchange rate is expected to remainconstant.
• The firm’s WACC is 9%, and the project is of average risk.
What is the dollar-denominated net present value (NPV) of thisproject?
$2,580.13
$2,345.57
$2,697.41
$2,228.29

Answer & Explanation Solved by verified expert

3.7 Ratings (693 Votes)

Solution WACC is used as the discount rate in order to calculate the present value i 9 or 009 Present value of Cash inflow 61500 11i 61500 11i2 61500 11i3 Present value of Cash inflow 61500 1109 61500 11092 See Answer

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•	The project requires a 130,000 peso investment today and isexpected to generate cash flows of 61,500 pesos at the end of thenext three years.
•	The current U.S. exchange rate with the Mexican peso is 10.946pesos per U.S. dollar, and the exchange rate is expected to remainconstant.
•	The firm’s WACC is 9%, and the project is of average risk.