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solution

Your company is contemplating on investing in a manufacturing facility in China. You are
charged with doing the financial analysis for this project. You expect the cash flows (in
Chinese RMB) for this project to last indefinitely. You estimated the following cash flows
for 2020-2024 and that the cash flows will grow at a constant rate starting 2025. (12 points)
Year FCF Other Data
2020 -70,000,000 RMB Growth rate of RMB FCF starting 2025 = 3%
2021 8,000,000 RMB Cost of Capital for similar U.S. Projects (WACC) = 12%
2022 9,000,000 RMB Inflation in the U.S. = 2%
2023
2024
10,000,000 RMB
12,000,000 RMB
Inflation in China = 6%
Spot rate = 6.5 RMB/USD
a) What is the appropriate discount rate you should use to discount the RMB cash flows?
b) What is the RMB NPV and IRR for this project? (If Excel is used, please cut and paste
it here, showing all the cash flows and answers to this question.)
c) What is the USD NPV for this project? (Please show your calculation converting
RMB NPV to USD NPV.)
d) What is the RMB cost of capital and RMB NPV if inflation in China rises to 8% and
the U.S. inflation drops to 1%?

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