Computing npv in capital budgeting exercise

Reference no: EM1310767

Q1) United Technologies Inc. (UT) just manufactured manufacturing plant in China. Construction cost 9 billion Chinese Yuan. UT intends to leave plant open for 3 years. In the 3 years of operation, Yuan cash flows are expected to be 3 billion Yuan, 3 billion Yuan, and 2 billion Yuan, respectively. Operating cash flows will start one year from today and are remitted back to parent at end of each year. At the ending of third year, UT expects to sell plant for 5 billion Yuan. UT has required rate of return of 17%. It presently takes 2.75 Yuan to buy one U.S. dollar, and Yuan is expected to reduce by 7% per year.

a) Find out NPV for this project. Must United Technologies build plant?

b) How would your reply change if value of Yuan was expected to stay unchanged from its present value of 2.75 Yuan per U.S. dollar over course of the 3 years? Must United Technologies create plant then? NPV would therefore be ______?

c) Recall that Yuan 5 billion of cash flow in year three represents salvage value. United Technologies is not totally certain that salvage value will be this amount and wants to find out NPV without this amount in capital budgeting exercise. NPV would therefore be $_______?

Reference no: EM1310767

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