Saputo Inc. is a Canadian diary company and one of the country's top 10 exporters, earning approximately $15B in revenue per year. Saputo has subsidiaries in the USA, UK, Argentina, and Australia.

Assume Saputo Inc is considering 2-year project in Mexico with a CAD $25million initial investment and:

Saputo's cost of capital is 5%
The required rate of return for this project is 10%
The project estimated to generate MXN $175million (pesos) in Year 1 and MXN $300million (pesos) in Year 2, excluding the salvage value
The Mexican peso (MXN) exchange rate is steady at $0.062 over the 2-year period.
 
What is the Mexican break-even salvage value? Show all your work.
If the salvage value is expected to be MXN $1million (pesos), is the project feasible?  Why or why not?
If the Mexican dollar depreciates in Year 2 instead of staying stable, would this have a positive, negative, or no effect on Saputo's NPV? Explain.

Answer rating: 100% (QA)

To calculate the Mexican breakeven salvage value we need to find the minimum salvage value that would result in a zero NPV for the project The salvage ... View the full answer