Capital Budgeting Techniques
A US firm is considering an investment in Tanzania, which will cost TZS200 million and is expected to produce an income of TZS30 million in real terms in each of the next 7 years. The firm estimates that the appropriate cost of capital for the project is 8%. Annual interest rates are 9% in Tanzania, 7⅞% in the US, the spot exchange rate is TZS1354.50 per US$, and inflation in Tanzania is expected to average 6% per year. At the end of the seventh year the US firm expects to sell the Tanzanian investment to a local firm for TZS50 million.
Required
You have been selected as the firm’s financial analyst and you have been assigned the task of supervising the international capital budgeting analysis. Evaluate and comment on the economic viability of the proposed project using the NPV method applying the following techniques:
- Centralized Capital Budgeting and
- Decentralized Capital Budgeting Techniques)
UK Engineering Company
Consider the following capital budgeting decision: a UK engineering company has been exporting to Holland for a number of years, and the company is considering establishing an engineering subsidiary in Holland. Suppose the project is expected to generate the following additional cash flows in Euros:
Year 0 1 2 3 4 5
Expected CF -600 400 450 510 575 650
The UK company’s cost of capital is 16%, and the risk free rate of interest in the UK, r£ is 8%, and in Holland, reuro is 9%. The current spot exchange rate is £1 = 2Euro.
Required: Calculate the NPV of the project.
