Problem:
An American firm is evaluating an investment in Mexico. The project will require purchasing equipment from a variety of sources and shipping it to Mexico. The projected cost of buying the equipment and shipping it is $4.2 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $2,900,000 each year in the U.S. and the costs of the project are projected to be 7 million pesos each year for the 5 years. If taxes are 35%, the appropriate discount rate is 10% and you use the current exchange rate for pesos:
Required:
Question 1: Calculate the NPV in U.S. dollars.
Question 2: Calculate the NPV in Mexican pesos.
Note: Show supporting computations in good form.