Question
Zolar Inc, just constructed a manufacturing plant in Canada. The construction cost 9 billion Canadian dollar. Zolar intends to leave the plant open for 3
Zolar Inc, just constructed a manufacturing plant in Canada. The construction cost 9 billion Canadian dollar. Zolar intends to leave the plant open for 3 years. During the 3 years of operation, dollar cash flows are expected to be 3 billion dollar, 3 billion dollar, and 2 billion dollar, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Zolar expects to sell the plant for 5 billion dollar. Zolar has a required rate of return of 17 percent. It currently takes 1.28 to buy one U.S. dollar, and the Canadian dollar is expected to depreciate by 5 percent per year.
(i) Determine the NPV for this project. Should Zolar build the plant?
(ii) How would your answer change if the value of the Canadian dollar was expected to remain unchanged from its current value of 1.28 Canadian dollar per U.S. dollar over the course of the 3 years? Should Brower construct the plant then?
(Please provide detailed answer)
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