A U.S.-based firm is considering a five- year project in Colombia. The following information is available...

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A U.S.-based firm is considering a five- year project in Colombia. The following information is available about the project: Initial investment. The initial investment of USD 800,000 is used to purchase capital equipment. This equipment will be depreciated straigh line to zero. At the end of five years, the remaining equipment will be sold for Colombian Peso (COP) 150,000,000. Working capital. investment in working capital is COP 210,000,000. There are no changes in working capital until the end of the project when the full amount is recovered. Units, price, and costs. The firm will produce 2000 units of a product annually. The selling price is expected to COP 650000 in the first year. This price is expected to increase at a rate of 4 percent annually. The direct expense per unit is expect to be COP 210000 in the first year. This is expected to increase at a rate of 7 percent annually. Indirect expenses are expected to be COP 75,000,000 annually. Taxes and miscellaneous. Colombian taxes on income and capital gains are 33 percent. There are no additional withholding taxes. All cash flows are repatriated when generated, and there are no additional U. S. taxes. The parity conditions are assumed to hold between Colombia and the United States. The relevant inflation indexes indicate a rate of 2 percer for the United States and 6 percent for Colombia. Spot USDCOP equals 3100. Brady's USD denominated WACC is 13 percent. a. Calculate COP cash flows. b. What is the appropriate COP discount rate? Calculate the project NPV. C. Use parity conditions to generate future spot rates. Calculate the project NPV in USD. d. Calculate break- even units. e. Now assume that the COP rate of annual depreciation doesn?t follow parity conditions. What is the break- even rate of depreci in COP? f.Assuming the USD inflation is unchanged, what is the COP inflation rate consistent with this break- even depreciation? A U.S.-based firm is considering a five- year project in Colombia. The following information is available about the project: Initial investment. The initial investment of USD 800,000 is used to purchase capital equipment. This equipment will be depreciated straigh line to zero. At the end of five years, the remaining equipment will be sold for Colombian Peso (COP) 150,000,000. Working capital. investment in working capital is COP 210,000,000. There are no changes in working capital until the end of the project when the full amount is recovered. Units, price, and costs. The firm will produce 2000 units of a product annually. The selling price is expected to COP 650000 in the first year. This price is expected to increase at a rate of 4 percent annually. The direct expense per unit is expect to be COP 210000 in the first year. This is expected to increase at a rate of 7 percent annually. Indirect expenses are expected to be COP 75,000,000 annually. Taxes and miscellaneous. Colombian taxes on income and capital gains are 33 percent. There are no additional withholding taxes. All cash flows are repatriated when generated, and there are no additional U. S. taxes. The parity conditions are assumed to hold between Colombia and the United States. The relevant inflation indexes indicate a rate of 2 percer for the United States and 6 percent for Colombia. Spot USDCOP equals 3100. Brady's USD denominated WACC is 13 percent. a. Calculate COP cash flows. b. What is the appropriate COP discount rate? Calculate the project NPV. C. Use parity conditions to generate future spot rates. Calculate the project NPV in USD. d. Calculate break- even units. e. Now assume that the COP rate of annual depreciation doesn?t follow parity conditions. What is the break- even rate of depreci in COP? f.Assuming the USD inflation is unchanged, what is the COP inflation rate consistent with this break- even depreciation?

Answer rating: 100% (QA)

Calculate the WACC for COP as follows COP WACC USD WACC COP Inflation rate 13 6 19 Year Particular 0 1 2 3 4 5 A Initial investment 800000 X 3100 2480000000 B Working Capital 210000000 C Sales unit 20... View the full answer