Question: Your employer, a Houston firm, asks you to evaluate an investment in a mining venture in Mexico. The outlay is USD 9.0 million.
Your client requires a rate of return of 20 percent in USD.
The venture is an on-going concern that has generated free cash flows of MXP 60 million per year. Geologists project that it will continue to do so for the next three years at which point the project will end. The current spot rate is $0.08/MXP, and currently nominal interest rates are as follows,
Term (yrs) US Mexico
1 1.5% 7%
2 2.5 9
3 2.5 12
1. What would be the forward rate set today on a one-year forward contract?
a) $0.0876
b) 0.0811
c) 0.0787
d) 0.0759
2. What would be the forward rate set today on a two-year forward contract?
a) $0.0707
b) 0.0733
c) 0.0699
d) 0.0785
3. What would be the forward rate set today on a three-year forward contract?
a) 0.0707
b) 0.0733
c) 0.0613
d) 0.0699
4. What would be the expected USD cash inflow for year one?
a) $3,534,789.21
b) 3,781,255.21
c) 4,553,271.03
d) 2,555,111.21
5. What would be the expected USD cash inflow for year two?
a) $4,244,592.21
b) 3,534,789.21
c) 2,612,317.21
d) 1,234,567.21
6. What would be the expected USD cash inflow for year three?
a) $2,333,444.34
b) 1,389,986.13
c) 2,241,421.17
d) 3,679,245.48
7. What is the expected IRR?
a) 21.05%
b) 22.15%
c) 19.05
d) 17.97%
8. Should the project be accepted based on the IRR criterion?
a) YES
b) NO
9. What is the expected NPV?
a) -$128,781.01
b) 128,781.01
c) -201,101.01
d) 201,101.01
10. Should the project be accepted based on the NPV?
a) YES
b) NO