Question Details

Operating cash flows will begin one year from today 



1. Capital Budgeting Example. Brower, Inc. just constructed a manufacturing plant in Ghana. The
construction cost 9 billion Ghanian 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 17 percent. It currently
takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per
year.
a. Determine the NPV for this project. Should Brower build the plant?
b. How would your answer change if the value of the cedi was expected to remain unchanged
from its current value of 8,700 cedis per U.S. dollar over the course of the three years? Should
Brower construct the plant then?
2. Impact of Financing on NPV. Ventura Corp., a U.S.-based MNC, plans to establish a subsidiary
in Japan. It is very confident that the Japanese yen will appreciate against the dollar over time. The
subsidiary will retain only enough revenue to cover expenses and will remit the rest to the parent
each year. Will Ventura benefit more from exchange rate effects if its parent provides equity
financing for the subsidiary or if the subsidiary is financed by local banks in Japan? Explain.



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