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Question - Ford plans to construct a manufacturing plant in China. The construction costs 9 billion Chinese Yuan. Ford expects to leave the plant running for three years. During the three years of operation, Yuan cash flows (CF) are expected to be 3 billion Yuan, 3 billion Yuan, and 2 billion you, 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, Ford expects to sell the plant for 5 billion Yuan. Ford has a required rate of return of 17.7 percent. It currently takes 6.27 Yuan to buy one U.S. dollar, and Yuan is expected to depreciate by 5 percent per year.
Required -
1. Find the NPV for the project (show your calculations in your answer). Should Ford build the plant? Explain.
2. How would your answer change if the value of the Yuan was expected to remain unchanged from its current value of 6.27 per U.S. dollar over the course of the three years? Should Ford construct the plant then?
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