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 $=200,000,000$ pesos

Cash Flow $($DF$)$: $50,000,000$ pesos at the end of Year $1,$ with Cash Flows

increasing $12\%$ each year

Required Rate of Return $(k)=20\%$

Salvage Value $(SV)=75,000,000$ pesos

Time at which target will be sold $(n)=5$

In this case, assume that exchange rates will remain the same from IO until the

target is sold.

Yes. The NPV is $125,000,000$ pesos.

No$.$ The NPV is $-17,653,598$ pesos.

Yes. The NPV of the target takeover is $192,642,368$ pesos.

Yes. The NPV of the target takeover is $12,487,320$ pesos.

Question $3$

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.

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.

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.

No$.$ We should always reject a target takeover when the foreign currency is

expected to depreciate against the dollar.

No$.$ The new NPV$,$ factoring in the exchange rate at present and expected

exchange rate in $5$ years, is $-341,485$ U$.$S Dollars. I JUST NEED HELP WITH QUESTION #$3.$ I KNOW HOW TO DO #$2.$ THANK YOU