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Case Problem
Roswell Co. just constructed a manufacturing plant in Ghana. The construction cost 10 billion Ghanian cedi. Roswell intends to leave the plant open for three years. During the three years of operation, cedi cash flows are expected to be 4 billion cedi, 4 billion cedi, and 3 billion cedi, 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, Roswell expects to sell the plant for 6 billion cedi. Roswell has a required rate of return of 17 percent. It currently takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per year.
a) Discuss investment appraisal methods and which method is most appropriate to today's business world. Justify your answer based proper sources.
b) Determine the NPV for this project. Should Roswell build the plant? Provide your answer with appropriate calculation.
c) How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8,700 cedis per U.S. dollar over the course of the three years? Should Roswell construct the plant then?
d) How businesses reduce the impact of exchange rate exposures using derivative instruments. Discuss your answer.
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