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. 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?