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A firm whose home currency is the Mexican Peso (MXN) is considering an investment in the United States. The investment is expected to produce after-tax
A firm whose home currency is the Mexican Peso (MXN) is considering an investment in the United States. The investment is expected to produce after-tax United States dollar (USD) cash flows (in millions) as follows: Year 0: -USD555 Year 1: USD275 Year 2: USD288 Year 3: USD291 Year 4: USD295 The expected rates of inflation are constant at 6.55% in Mexico and 4.88% in the United States. The required returns for projects in this risk class are 16.35% in Mexico and 9.11% in the United States. The spot exchange rate is MXN22.84/USD. The project country's government has United States dollar-denominated bonds outstanding that currently yield 4.74% per annum. The Mexican firm pays a marginal corporate tax rate of 17% on its USD profits, which is the same marginal tax rate that the firm pays on its parent company profits in the Mexican peso. The US Government has a FDI policy stipulating that for all foreign projects, the first 3 years of USD cash flows generated by the project must be loaned to the country's government at an interest rate of 0% per annum for a period of exactly 3 years after they are generated by the project. How much financial value-add does the project provide to the MNC? a. MXN6,164.259 milllion b. USD9,935.000 million c. USD766.515 million d. MXN6503.101 million e. USD284.724 million
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