Question
Nestle will operate a new production plant in Malaysia and intend to run the plant for 4 years. The construction cost of the plant is
Nestle will operate a new production plant in Malaysia and intend to run the plant for 4 years. The construction cost of the plant is RM6 million. The plant will generate cash flow of RM2 million every year for all the 4 years of operation. At the end of the project life, the plant will be disposed of with a salvage value of RM1 million. The cash flow received will be remitted back to the home country Switzerland at the end of every year. Nestle has a required return of 20%. It currently takes RM4.5 to buy one Swiss Franc and ringgit Malaysia is expected to appreciate by 3% every year. (a) Assess the feasibility of the project using NPV. Should Nestle go ahead with the project. (10 marks)
(b) Assess the project again if the exchange rate of RM remains unchanged during the course of 4 years of the project.
(10 marks)
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