Question
Based on the foreign currency approach what should Hal recommend? Please explain with the help of suitable calculations. Under the foreign currency approach the cash
Based on the foreign currency approach what should Hal recommend? Please explain with the help of suitable calculations.
Under the foreign currency approach the cash flows in India are calculated in Indian rupees for the seven-year joint venture agreement. Siemens Technologies 50% share of the net cash flows is then discounted using the foreign currency required return, calculated as the home currency required return + the interest rate differential. The NPV of the project is calculated in Indian rupees and then converted to US$ using the spot exchange rate. The IRR is calculated using the Indian rupee denominated cash flows and compared with the foreign currency required return.
Rs 15,000,000/10 = Rs 15,000,000
Rs 128,750,000 - 64,375,000 - 15,000,000 - 19,750,000 + 15,000,000 =
Rs 44,625,000
Rs 150,000,000 0.7 * 150,000,000 = Rs 45,000,000 NBV
0.5 * 1.25 * 45,000,000 = Rs 28,125,000
Rs 25,000,000 * 0.5 = Rs 12,500,000
Rs 28,125,000 + 12,500,000 = Rs 40,6250,000
NPV is 15% - 953,655.56
IRR is 23%
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