Investment appraisals

Proposed new project

The proposed new project is to open a number of new supermarkets in country T, a neighbouring country, which uses currency T$. Market research has already been undertaken at a cost of D$ 0.3
million. If the purposed project is approved additional logistics planning will be commissioned at a
cost of D$ 0.38 million payable at the start of 20X0.

Other forecast project cash flows:

Initial investment on 1 January 20X0 T$ million 150
Residual value at the end of 20X4 T$ million 40
Net operating cash inflows:

20X0 T$ million 45
20X1 and 20X2 growing at 20% a year from 20X0 levels
20X3 and 20X4 growing at 6% a year from 20X2 levels

Additional information:

On 1 January 20X0, the spot rate for converting D$ to T$ is expected to be D$1 = T$ 2.1145.
Dominique has received two conflicting exchange rate forecasts for the D$/T$ during the life of the project as follows:

Forecast A A stable exchange rate of D$1= T$2.1145

Forecast B A devaluation of the T$ against the D$ of 5.4% a year

Business tax is 20% in Country T, payable in the year in which it is incurred.

Tax depreciation allowances are available in Country T at 20% a year on a reducing balance basis.

All net cash flows in Country T are to be remitted to Country D at the end of each year

An additional 5% tax is payable in Country D based on remitted net cash flows net of D$ costs but no tax is payable or refundable on the initial investment and residual value capital flows.

The project is to be evaluated, in D$ , at a discount rate of 12% over a five year period.

Required:

(a) Calculate the initial investment for the new project.

(b) Calculate the D$ NPV of the project cash flows as at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.

(c) Calculate and discuss the MIRR of the project as at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.

(d) Calculate the Pay Back Period for the project at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.

How should I go about it pls