How do I calculate the net present value (NVP) of the proposed investment?

How do I provide a recommendation of the company, including a discussion of the strengths and risks of the company's financial position based on analysis, integrated concepts, and data?

The proposal involved establishing a wholly-owned subsidiary in India that would produce machines for the Indian domestic market as well as for export to other Asian countries. The initial equity investment would be $1.5 million, equivalent to 67.5 million Indian rupees (Rs) at the exchange rate of Rs 45 to the U.S. dollar. (Assume that the Indian rupee is freely convertible, and there are no restrictions on transfers of foreign exchange out of India.) An additional Rs 27 million would be raised by borrowing from a commercial bank in India at an interest rate of 10 percent per annum. The principal amount of the bank loan would be payable in full at the end of the fourth year. The combined capital would be sufficient to purchase plant and equipment of $1.8 million and would cover other initial expenditures, including working capital. The cost of equipment installation would be $15,000, with another $5,000 for testing. No additional working capital would be required during the 4-year period. The plant was expected to have a salvage value of Rs 10 million at the end of four years. Straight-line depreciation would be applied to the original cost of the plant.

The firm's overall marginal after-tax cost of capital was about 12 percent. However, because of the higher risks associated with an Indian venture, FMC decided that a 16 percent discount rate would be applied in evaluating the potential project.

Answer rating: 100% (QA)

To calculate the net present value NPV of the proposed investment we can use the discounted cash flow DCF analysis Here are the steps Determine the in... View the full answer