Assumptions
Case 2 Geo Tech Cash Flow Template (Base Case)											Expenses
											Cash Costs
Year				0	1	2	3	4	5		Setup per contract	$14,000.00	CAD
					$600,000.00	$1,080,000.00	$1,050,000.00	$750,000.00	$570,000.00		Other Operating
Revenues											Greater then 55	$360,000.00	CAD
Cash Costs											Less then 55	$240,000.00	CAD
Set up					$280,000.00	$420,000.00	$280,000.00	$140,000.00	$140,000.00		Revenues		2015
Other operating					$240,000.00	$240,000.00	$360,000.00	$360,000.00	$240,000.00		Annnual new Contracts		20
Depreciation					$280,000.00	$280,000.00	$280,000.00				Set-up Fee Income	$21,000.00
EBIT					-$200,000.00	$140,000.00	$130,000.00	$250,000.00	$190,000.00		Annual Licensing Fee	$9,000.00
Taxes					-$70,000.00	$49,000.00	$45,500.00	$87,500.00	$66,500.00
Net Operating Income After Taxes					-$130,000.00	$91,000.00	$84,500.00	$162,500.00	$123,500.00		Tax Rate	35.00%
Add Depreciation					$280,000.00	$280,000.00	$280,000.00				Initial Investment	$840,000.00
Net Operating Cash Flows					$150,000.00	$371,000.00	$364,500.00	$162,500.00	$123,500.00		3 Yeat Straigt Line Depreciation	$280,000.00
Recovery of Capital Assets (AT)									$65,000.00
Project Cost				-$840,000.00							End of Project MV	$100,000.00
Total Cash Flow (CAD)				-$840,000.00	$150,000.00	$371,000.00	$364,500.00	$162,500.00	$188,500.00
Exchange Rate				0.860	0.860	0.860	0.860	0.860	0.860		Project Discount Rate (WACC)	9.65%
Total Cash Flow (USD)				-$722,400.000	$129,000.000	$319,060.000	$313,470.000	$139,750.000	$162,110.000
											US Inflation	1.50%
Rate											CAD Inflation	1.75%
NPV	$819,746.19
IRR	15%										Current Exchange Rate	0.86

I am only interested in

Project Analysis IV, Inflation, FX Forecast. Use the above Base case solution for IV analysis of inflation and FX forecast for the below case.

Exchange Rate Considerations. An added source of adventure in any multinational setting is the foreign currency or exchange rate problem. Geo Tech is a US company that will pay out US dollars (USD) and will receive Canadian dollars (CAD). Since the proposed project is located in Canada, the expenditure side involves converting USD to CAD, and the revenue side involves converting CAD to USD.

Cash Flows. The initial exchange rate is provided in the narrative. It is convenient to set up notation for an exchange rate as S_USD/CAD, where S is the spot exchange rate in terms of USD for CAD, in other words, the USD price of the CAD (how much US must be paid for a Canadian dollar). This is really the only exchange rate information required, because the Canadian price of the USD is related to the US price of the CAD as follows: S_CAD/USD = 1/ S_USD/CAD.

You must be very careful about translating the cash flows appropriately. For example, the narrative quotes the annual Foresight license at 8,000 USD, equivalent to 9,302 CAD at the current exchange rate of 0.86 USD per CAD (8000 x 1/0.86 = 9302 or simply 8000/0.86 = 9302). The Case states that this CAD fee is rounded to the nearest $1,000, for a fee of 9,000 CAD. Set-up fees in CAD are determined in the same manner.

Ultimately, Geo Tech will be making an investment decision based on NPV in USD terms. The project cost at Year 0 is estimated at 840,000 CAD. You should determine the USD equivalent. When you determine the annual project cash flows, the last step is to convert the net cash flows into USD.

Exchange Rate Risk and Estimation. Exchange rates do not stay constant, indeed they change constantly. So it is necessary to forecast exchange rates over the life of the project, and this introduces additional risk. Information is provided regarding an exchange rate forecast and projected inflation.