Problem
A US company manufactures design components for personal computers. Until the present, manufacturing has been subcontracted to other companies, but for reasons of quality control the company has decided to manufacture itself in Malaysia. The Malaysia manufacturing facility would require a purchase of equipment with a price and additional installation cost totaling MYR 26,000. Although most after-tax operating outflows would be in Malaysian ringgit for the amount of MYR 8,000, some additional U.S. dollar cash outflows (expenses) would be necessary, which is $100 each year. The Malaysia ringgit currently trades at MYR4.20 = USD1.00 and the company expects the Malaysian ringgit to appreciate 2.0% per year against the dollar. The weighted average cost of capital for the US company is 14.0%.
i. What is the after-tax cash flow for the Malaysia facility at the end of the first year in dollar?
ii. What is the NPV in dollar of the Malaysia facility?