PROBLEM 5:5)) ElectronUS is a US MNC that is considering establishing a subsidiary in Thailandthat would manufacture
Question:
PROBLEM 5:5)) ElectronUS is a US MNC that is considering establishing a subsidiary in Thailandthat would manufacture and sell specialty computer parts locally.Calculate the NPV from ElectronUS perspective.Relevant cash flows are given below:
-The project would require a manufacturing facility (plant), equipment and working capital that are expected to cost 50 million Thai Bhat (THB).
-The project is expected to last for 3 years and generate operating cash flows of 16 million THB per year after all taxes imposed by the Thai government.
-At the end of 3 years, the Thai government has promised to purchase the plant from the ElectronUS for 25 million THB.
-The spot exchange rate is $0.038/1THBand the expected exchange rate over the next three years is:
Year 0Year 1Year 2Year 3
$0.038$0.037$0.036$0.035
-The subsidiary plans to send all net cash flows back to the parent firm at the end of each year.
-The required rate of return for this project is 11%.
Yr 0Yr 1Yr 2Yr 3
InitialInvestment-50 million THB
OCFproduced
By the Subsidiary16 mil THB16 mil THB16 mil THB
S$ Salvage value25 mil THB
US$ dollars paid/received
By ElectronUS
_______________________________________
NPV = ___150,086.40____________
Answer the upcoming question related to problem 5 Question:
Suppose that in problem 5, the Thai Bhat unexpectedly strengthens against the US dollar over the next three years as follows:
Year 0Year 1Year 2Year 3
$0.038$0.039$0.040$0.041
Briefly describe whether the strengthening Thai Bhat will have a positive effect on NPV or an adverse effect on the NPV of the project as evaluated in problem 5? (You don't have to recalculate NPV unless you want to).