An American firm has the opportunity to acquire a target company in Mexico. The firm anticipates...

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An American firm has the opportunity to acquire a target company in Mexico. The firm anticipates owning the subsidiary for 8 years. Is this a profitable investment, and if so, what is the projected NPV? Initial Outlay = 200,000,000 pesos Cash Flow (DF): 50,000,000 pesos at the end of Year 1, with Cash Flows increasing 18% each year Required Rate of Return (k) = 20% Salvage Value (SV) = 75,000,000 pesos Time at which target will be sold (n) = 8 Assume that we will bring half of the positive cashflow back to the U.S. each year. At the end of the 8 years, all remaining cash will be converted back to U.S. dollars. Assume exchange rates as unfavorable as 23 Pesos per dollar or as favorable as 17 Pesos per dollar. Exchange rate is "Year Zero" is 20 Pesos per dollar. Run a model or multiple models. Would you accept or reject this takeover opportunity, and under what circumstances? An American firm has the opportunity to acquire a target company in Mexico. The firm anticipates owning the subsidiary for 8 years. Is this a profitable investment, and if so, what is the projected NPV? Initial Outlay = 200,000,000 pesos Cash Flow (DF): 50,000,000 pesos at the end of Year 1, with Cash Flows increasing 18% each year Required Rate of Return (k) = 20% Salvage Value (SV) = 75,000,000 pesos Time at which target will be sold (n) = 8 Assume that we will bring half of the positive cashflow back to the U.S. each year. At the end of the 8 years, all remaining cash will be converted back to U.S. dollars. Assume exchange rates as unfavorable as 23 Pesos per dollar or as favorable as 17 Pesos per dollar. Exchange rate is "Year Zero" is 20 Pesos per dollar. Run a model or multiple models. Would you accept or reject this takeover opportunity, and under what circumstances?

Answer rating: 100% (QA)

The NPV of the Mexican subsidiary acquisition can be calculated using the following formula NPV 2000... View the full answer