Given question #2: An American firm has the opportunity to acquire a target company in Mexico. The firm anticipates owning the subsidiary for 5 years. Is this a profitable investment, and if so, what is the projected NPV? (The firm will calculate NPV in pesos, using the required rate of return below.)

Initial Outlay = 200,000,000 pesosCash Flow (DF): 50,000,000 pesos at the end of Year 1, with Cash Flows increasing 12% each yearRequired Rate of Return (k) = 20%Salvage Value (SV) = 75,000,000 pesosTime at which target will be sold (n) = 5In this case, assume that exchange rates will remain the same from IO until the target is sold.

NPV = 12,487,320 pesos

answer the following

Suppose that the American firm in Question 2 needs to convert dollars to pesos at the beginning of the timeframe at a rate of 20 pesos per dollar. However, the firm expects the exchange rate to be 22 pesos per dollar at the end of the timeframe. (The firm will calculate NPV in pesos, using the required rate of return below, but it needs to account for the change in exchange rate which it is anticipating.) Is the target still profitable with the required rate of return? Why or why not? Choose the best answer.

A) No. The new NPV, factoring in the exchange rate at present and expected exchange rate in 5 years, is -341,485 U.S Dollars.

B) Yes. The new NPV, factoring in the exchange rate at present and expected exchange rate in 5 years, is 1,533,457 U.S Dollars.

C) No. We should always reject a target takeover when the foreign currency is expected to depreciate against the dollar.

D) Yes. The new NPV, factoring in the exchange rate at present and expected exchange rate in 5 years, is 4,772,727 U.S Dollars.