Question
Gamma Inc., just constructed a manufacturing plant in South Korea. The construction cost 1.8 billion Korean won. Gamma intends to leave the plant open for
Gamma Inc., just constructed a manufacturing plant in South Korea. The construction cost 1.8 billion Korean won. Gamma intends to leave the plant open for three years. During the three years of operation, won cash flows are expected to be 0.6 billion won, 0.55 billion won, and 0.5 billion won, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Gamma expects to sell the plant for 1 billion won. Gamma has a required rate of return of 14 percent. It currently takes 1,000 won to buy 1 U.S. dollar, and the won is expected to depreciate by 5 percent per year. a. Determine the NPV for this project. Should Gamma build the plant? b. How would your answer change if the value of the won was expected to remain unchanged from its current value of 1,000 won per U.S. dollar over the course of the three years? Should Gamma construct the plant then?
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