A firm whose home currency is the Mexican Peso (MXN) is considering an investment in the United
Question:
A firm whose home currency is the Mexican Peso (MXN) is considering an investment in the United States. The investment is expected to produce after-tax United States dollar (USD) cash flows (in millions) as follows:
Year 0: USD450
Year 1: USD262
Year 2: USD275
Year 3: USD288
Year 4: USD291
The expected rates of inflation are constant at 5.44% in Mexico and 3.77% in the United States. The required returns for projects in this risk class are 16.35% in Mexico and 9.11% in the United States. The spot exchange rate is MXN22.84/USD.
The project country’s government has United States dollar-denominated bonds outstanding that currently yield 4.45% per annum. The Mexican firm pays a marginal corporate tax rate of 18.5% on its USD profits, which is the same marginal tax rate that the firm pays on its parent company profits in the Mexican peso.
The US Government has a FDI policy stipulating that for all foreign projects, the first 3 years of USD cash flows generated by the project must be loaned to the country’s government at an interest rate of 0% per annum for a period of exactly 3 years after they are generated by the project. How much financial value-add does the project provide to the MNC?
a.
MXN8,965.831 million
b.
USD419.846 million
c.
USD766.515 million
d.
MXN8,424.304 million
e.
USD349.623 million
Managerial Economics A Problem Solving Approach
ISBN: 978-1133951483
3rd edition
Authors: Luke M. Froeb, Brian T. McCann, Mikhael Shor, Michael R. War