One of your clients, a wealthy Houstonian, asks you to evaluate the following investment in a mining venture in Mexico. The investment (outlay) is 2 million dollars. The venture is expected to generate free cash flows of MP 10 million per year for the next three years at which point it will cease. There is no salvage value. The current spot rate is $0.08/MP, and currently nominal interest rates on one- through three-year debt instruments are as follows:
Term (yrs) US Mexico
1 6% 8%
2 3% 7%
3 5% 4%
Using Excel answer the following questions. You must use Excel cell referencing formulas where noted (in blue) in the Excel sheet.
1-Assuming the International Fisher Effect holds, Find the NPV of the project (in dollars) if your client requires a 20% rate of return. Is the project acceptable?
2-Assuming the International Fisher Effect holds, Find the NPV of the project (in dollars) if your client requires a 10% rate of return.