You are working for the Swedish car manufacturer Volvo Group that is considering establishing a three-year project in Sri Lanka with a 2.3 million initial investment. The project is expected to generate cash flow of Rs. 150 million in Year 1 and Year 2, and Rs. 250 million in Year 3. The end of the project salvage value is Rs. 210 million. There is a 20 percent withholding tax. All cash flows are remitted to the parent. Sri Lankan government has a restriction: you are not allowed to send funds to the parent in Sweden for the first 2 years. Funds can only be sent to the Swedish parent firm in Year 3. You earn 4 percent interest by investing the funds in the Sri Lankan money market.

Your supervisor, Walter White, has a given you a task to figure out whether Volvo should invest in this project. Your team has forecasted a stable exchange rate of Rs. 220/ over the next three years.

Question 1:

a. Should Volvo invest in this project?

b. Would Volvo make more profits if the Sri Lankan government lifts the restriction on blocked funds? Explain (intuition) why without any calculations.