Question
You work for a U.S.-based firm that established a subsidiary in Mexico a number of years ago. Under the original plans, your firm intended to
You work for a U.S.-based firm that established a subsidiary in Mexico a number of years ago. Under the original plans, your firm intended to operate the subsidiary for another year. However, you are reassessing the situation because exchange rate forecasts for the Mexican peso (MXN) indicate that it may depreciate from its current level of $0.046 to $0.040 next year. You could sell the subsidiary today for 100 million MXN. If you continue to operate the subsidiary, it will generate operating cash flows of 150 million MXN next year that will be remitted back to your firm. The required rate of return for this project is 25%. What is the net present value in U.S. dollars of divesting the Mexican subsidiary and should your firm divest the subsidiary?
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