1. Middleton Inc in the US, a handbag producer, decides to produce and sell in Mexico for the next 5 years to benefit from the improving economy in Mexico. The initial investment for the project is USD1 mn. Spot rate of MXN is $0.05.

Middleton expects to generate cashflows of MXN1 mn in year1, MXN1.5 mn in year 2, MXN2 mn in year 3, MXN3 mn in year 4 and MXN3 mn in year 5. Salvage value of the factory is $500,000.

MXN is expected to appreciate by 6% each year in the next 5 years against USD.

Middleton requires a 15% return from the project.

1. Should Middleton do the project? Show the calculation to show why.
2. Assume that the economy in Mexico turned negative after the project was launched and MXN depreciated instead by 5% each year. Has Middleton made profits from the project. Show the calculation to show why, why not?