Alfax ltd. an American company intends to start a project in Kenya which will cost US$. 22
Question:
Alfax ltd. an American company intends to start a project in Kenya which will cost US$. 22 million. The project will have a five-year economic life and zero salvage value. It will generate the following revenue each year.
Year
1
2
3
4
5
Revenue Ksh."000"
6,000
8,000
10,000
13,000
10,000
Additional information;
(a) Annual operating costs each year excluding depreciation is estimated to be Ksh. 700,000
(b) The project is depreciated using straight line method
(c) The corporate tax rate in Kenya will be 35% p.a
(d) The current spot exchange rate is US $ 1 = Ksh 100 and the risk free rate is 8% in Kenya and 5% in US.
(e) The Kenyan regulations allow maximum repatriation of 70% of net revenue
(f) The company's desirable rate of return is 15% p.a
Required;
Determine the operating cash flows (net revenue) over the five-year period. (8 marks)
Determine the NPV of this project using the Home Currency approach and advice the management on its viability. (7 marks)
Cornerstones of Cost Management
ISBN: 978-1111824402
2nd edition
Authors: Don R. Hansen, Maryanne M. Mowen