Should cleto construct the plant then

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Reference no: EM13935671

Capital budgeting example. Cleto Srl (Spain) has just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanian cedi. Cleto intends to leave the plant open for three years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 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, Cleto expects to sell the plant for 5 billion cedi. Cleto has a required rate of return of 17%. It currently takes 8700 cedi to buy one euro, and the cedi is expected to depreciate by 5% per year.

a. Determine the NPV for this project. Should Cleto build the plant?

b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8700 cedi per euro over the course of the three years? Should Cleto construct the plant then?

Reference no: EM13935671

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