MOUNT CARMEL COLLEGE I.S.D.C.

FOREIGN INVESTMENT APPRAISAL

QUESTION 1
L. B. Inc. is considering a new plant in the Netherlands. The plant will cost 26 Million Guilders.
Incremental cash flows are expected to be 3 Million Guilders per year for the first 3 years, 4 Million
Guilders the next three, 5 Million Guilders in year 7 through 9, and 6 Million Guilders in years 10
through 19, after which the project will terminate with no residual value. The present exchange
rate is 1.90 Guilders per dollar. The required rate of return on repatriated $ is 16%. a) If the
exchange rate stays at 1.90, what is the project net present value ? b) If the guilder appreciates
to 1.84 for years 1 – 3 to 1.78 for years 4 – 6 to 1.72 years 7.9 and to 1.65 for years 10 - 19, what
happens to the present value?

QUESTION 2
OJ Ltd. is a supplier of leather goods to retailers in the UK and other Western European countries.
The company is considering entering into a joint venture with a manufacturer in South America.
The two companies will each own 50% of the limited liability company JV(SA) and will share profits
equally. £4,50,000 of the initial capital is being provided by OJ Ltd. and the equivalent in South
American dollars (SA$) is being provided by the foreign partner. The managers of the joint venture
expect the following net operating cash flows which are in nominal terms:

For tax reasons JV (SV) the company to be formed specifically for the joint venture will be
registered in South America. Ignore taxation in your calculations.
Requirements :
Assume you are the financial advisor retained by OJ Limited to advise on the proposed joint
venture. Calculate the NPV of the project under the two assumptions explained below. Use a
discount rate of 18% for both assumptions.
Assumption 1: The South America country has exchange controls which prohibits the payment
of dividends above 50% of the annual cash flows for the first three years of the project. The
accumulated balance can be repatriated at the end of the third year.
Assumption 2: The Government of the South American country is considering removing
exchange controls and restriction on repatriation of profits. If this happens all cash flows will be
distributed as dividend to the partner companies at the end of each year.

QUESTION 3
You have been engaged to evaluate an investment project overseas in a country called East
Africa, which is a politically stable country. The project involves an initial cost of East African dollar
2.5 crores (EA $) and it is expected to earn post tax cash flows as follows :
already given post tax cashflows

A.F.M. 1 C.A. Prabodh Nayak

[C.A., M.B.A.,C.F.A., P.G.D.T.F.M., C.M.A. (US), C.P.A.]
MOUNT CARMEL COLLEGE I.S.D.C.

Further, the following information is available :

a) Current spot rate is EA $ 2 per ₹ 1.
b) Risk free rate of interest in East Africa is 7% and in India 9%.
c) Required return from the project is 16%. You may make suitable (generally acceptable)
assumptions in order to evaluate the project.

QUESTION 4
Butler Company a UK company is considering undertaking a new project in Australia. The project
would require immediate capital expenditure of A$ 10million plus A$ 5m of working capital which
would be recovered at the end of the project’s four-year life. The net cash flows expected to be
generated from the project are A$ 13m before tax. Straight – line depreciation over the life of the
project are allowable expense against company tax in Australia, which is charged at the rate of
50% payable each year without delay. The project will have zero scrap value. Butler Company
will not have to pay any UK tax on the project due to a double – taxation avoidance agreement.
The A$/UKP spot rate is 2.0 and UKP is expected to appreciate against the A$ by 10% per year.
A similar risk, UK – based project would be expected to generate a minimum return of 20% after
tax. 1 uk pound = 2 A$ second unit is always 1

QUESTION 5
Sun Ltd is planning to import an equipment from Japan at a cost of 3,400 lakh Yen. The company
may avail loans at 18% p.a. with quarterly rests with which it can import the equipment. The
company has also an offer from Osaka branch of an India based bank extending credit of 180
days at 2% p.a. against opening of an irrevocable letter of credit.
Additional Information
Present exchange rate ₹100 = 340 Yen
180-day's Forward Rate ₹100 = 345 Yen
Commission charges for letter of credit at 2% per 12 months
Advise the company whether the offer from the foreign branch should be accepted.
quarterly rest - int will be calculated every once in 3 months ( int on int, compound way )



A.F.M. 2 C.A. Prabodh Nayak

[C.A., M.B.A.,C.F.A., P.G.D.T.F.M., C.M.A. (US), C.P.A.]