Question
Fairmount Corporation is considering a project in India that will have a start-up cost of 100 million rupees this year and a required rate of
Fairmount Corporation is considering a project in India that will have a start-up cost of 100 million rupees this year and a required rate of return of 15 percent. The project will have cash flows of 35 million rupees per year at the end of each of the next three years, and then the project will be sold for its salvage value of 15 million rupees in three years. The current spot rate for the rupee is $0.016, and the rupee is expected to appreciate relative to the U.S. dollar to $0.017 in one year, $0.018 in two years, and $0.019 in three years.
a. What is the net present value (NPV) of this project to Fairmount Corporation? Based on that NPV, should Fairmount Corporation pursue the project?
b. Suppose instead that Fairmount Corporation was uncertain about the breakeven salvage value of this project. What is the breakeven salvage value that would make the net present value (NPV) equal zero for this project (in rupees in the year the salvage value will be received)?
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