FM Co is a Zambian firm considering undertaking a foreign project whose cash flows are in US dollars. The investment will have a life of 10 years with a nil scrap value at the end of the project's life. The initial cost is US$800,000. The company uses a straight-line policy of depreciation. The other dollar net cash flows per year over the project's life are: Year Net Cash flows US$ 1 (20,000) 2 (40,000) 3 400,000 4 350,000 5 (50,000) 6 250,000 7 240,000 8 320,000 9 340,000 10 280,000 The dollar cost of capital and the reinvestment rates are 15% per year and 18% per annum respectively. The spot exchange rate between kwacha and the US dollars is K22.950 per US$1. The above project is tagged to be the first green project undertaken by FM company which likely to change the fortunes of the organization when successfully implemented. REQUIRED: a) Calculate the modified internal rate of return (MIRR) of the above projects and discuss the implications of undertaking such an investment. b) Determine the kwacha net present value (NPV) of the above project and highlight the challenges that FM company is likely to face as the pursue this investment. c) Recommend any TWO hedging strategies that FM Co can use to cushion the company's exposure to currency risk due to the above project. d) Discuss how the following non-financial factors would affect the implementation of a foreign project like FM's green project. i. Religion and culture of the host country. ii. Political landscape in the host country.
FM Co is a Zambian firm considering undertaking a foreign project whose cash flows are in US dollars. The investment will have a life of 10 years with a nil scrap value at the end of the project's life. The initial cost is US$800,000. The company uses a straight-line policy of depreciation. The other dollar net cash flows per year over the project's life are: Year Net Cash flows US$ 1 (20,000) 2 (40,000) 3 400,000 4 350,000 5 (50,000) 6 250,000 7 240,000 8 320,000 9 340,000 10 280,000 The dollar cost of capital and the reinvestment rates are 15% per year and 18% per annum respectively. The spot exchange rate between kwacha and the US dollars is K22.950 per US$1. The above project is tagged to be the first green project undertaken by FM company which likely to change the fortunes of the organization when successfully implemented. REQUIRED: a) Calculate the modified internal rate of return (MIRR) of the above projects and discuss the implications of undertaking such an investment. b) Determine the kwacha net present value (NPV) of the above project and highlight the challenges that FM company is likely to face as the pursue this investment. c) Recommend any TWO hedging strategies that FM Co can use to cushion the company's exposure to currency risk due to the above project. d) Discuss how the following non-financial factors would affect the implementation of a foreign project like FM's green project. i. Religion and culture of the host country. ii. Political landscape in the host country.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows
Section: Chapter Questions
Problem 14P
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Question
Kindly show the formulars been used manually and how the calculation is coming about.
Transcribed Image Text:FM Co is a Zambian firm considering undertaking a foreign project whose cash flows are in US
dollars. The investment will have a life of 10 years with a nil scrap value at the end of the
project's life. The initial cost is US$800,000. The company uses a straight-line policy of
depreciation. The other dollar net cash flows per year over the project's life are:
Year
Net Cash flows US$
1
(20,000)
2
(40,000)
3
400,000
4
350,000
5
(50,000)
6
250,000
7
240,000
8
320,000
9
340,000
10
280,000
The dollar cost of capital and the reinvestment rates are 15% per year and 18% per annum
respectively. The spot exchange rate between kwacha and the US dollars is K22.950 per US$1.
The above project is tagged to be the first green project undertaken by FM company which likely
to change the fortunes of the organization when successfully implemented.
REQUIRED:
a) Calculate the modified internal rate of return (MIRR) of the above projects and discuss
the implications of undertaking such an investment.
b) Determine the kwacha net present value (NPV) of the above project and highlight the
challenges that FM company is likely to face as the pursue this investment.
c) Recommend any TWO hedging strategies that FM Co can use to cushion the
company's exposure to currency risk due to the above project.
d) Discuss how the following non-financial factors would affect the implementation of a
foreign project like FM's green project.
i. Religion and culture of the host country.
ii.
Political landscape in the host country.
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