Explain the process to get to the answer:

5) You are asked to evaluate the following project for Humboldt Squid Inc., a Mexican fishing gear company. Humboldt Squid Inc., wants to set up a distribution network in America to distribute its fishing gear. The expected cash flows from the project in dollars are provided in the time line below. The American government is willing to provide Humboldt Squid with a non-amortizing loan of 40,000,000 dollars at a rate of 2 percent per annum over the next 4 years. If Humboldt Squid were to finance the project locally in America, their borrowing rate would be 7 percent per annum. The discount rate for similar projects in the United States is 30% and the discount rate for similar projects in Mexico is 35%. The current spot rate 12.36 Mexican pesos per dollar (M$/US$). The dollar is expected to appreciate by 5% per year for the next four years. Assume the effective tax rate in both the United States and Mexico is 38%. How much is the project value going to increase from the project perspective due to the government subsidized loan? Show all necessary calculations to support your answer.

(Cash flows in U.S. dollars)

-40,000,000 20,000,000 30,000,000 25,000,000 22,000,000

0 1 2 3 4

Annual after tax interest expense savings = 40,000,000*(.07-.02)*(1-.38) = 1,240,000

After tax market rate of debt = 7%*(1-.38)= 4.34%

CF₀ = 0

CF₁ = 1,240,000

F₁ = 4

I = 4.34

NPV = US$4,465,235.75 = M$55,190,313.86