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Aviva (USA) is considering opening a factory in Hungary. The following data are given. The initial investment is 2.5 Billion Forint. Current exchange rate (F/$)
Aviva (USA) is considering opening a factory in Hungary. The following data are given.
- The initial investment is 2.5 Billion Forint.
- Current exchange rate (F/$) = 2150. The spot rate is expected to move according to relative PPP between the U.S. and Hungary. U.S. and Hungarian inflation rates are expected to average 5 and 15 percent per year respectively over the investment period.
- Remittable operating cash flows in local currency are estimated to be as follows:
t | Cash flow (in millions) |
1 | 300 |
2 | 375 |
3 | 450 |
4 | 600 |
5 | 720 |
The applicable discount rate is 17%
- Lost sales from existing operation will cost Aviva an average of $50,000 per year. The applicable discount rate is 17%
- The project will generate a net-of-tax depreciation allowance of $120,000 per year for five years (Appropriate discount rate is 12%)
- Extra tax benefits of $15,000 per year can be generated with an applicable discount rate of 15%.
- At the end of the five year project life the nominal salvage value (in local currency) is expected to be 20% of the original cost in local currency (appropriate discount rate is 18%).
The part I am stuck on the most is how to get the CF($)
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