2. Aviva (USA) is considering opening a factory in Hungary. The following data are given.

a) The initial investment is 1 Billion Forint (F). (Ans. = $5m)

b) Current exchange rate ($/F) = 0.005. The forint is expected to depreciate against the dollar by10% per year over the investment period.

c) Remittable operating cash flows in local currency are estimated to be as follows:

T: 1, 2, 3, 4, 5, Cash Flow (in millions): 300, 375, 450, 600, 720

The applicable discount rate is 15%. [Ans = $5,583,059]

d) Lost sales from existing operating will cost Aviva an average of F30m per year. The applicable discount rate is 10%.

e) The project will generate a net-of-tax depreciation allowance of F65m per year for five years (Appropriate discount rate is 10%).

f) Extra tax benefits of F3.5m per year can be generated with an applicable discount rate of 10%. (Answer for d+e+f = $548,641)

g) At the end of the five year project life the nominal salvage value (in local currency) is expected to be 15% of the original cost in local currency (appropriate discount rate is 15%). [Ans. = $220,183]

Should Aviva build this factory? (Use APV as a decision rule). [Answer: $1,351,884] ACCEPT!

Use the information provided above to answer the following questions.

I) What is the value of the initial investment in dollar terms?

II)What will be the applicable exchange rate at the end of year 5?

III)What is the present value, in dollars, of the year 5 cash flow from operations?

IV)Obtain the present value in dollars of the salvage/residual described in the problem.