Textbook Problem

Assessing a Foreign Project Funded with Debt and Equity Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentinean pesos (AP) at the end of each of the next four years. It will have to pay operating expenses of AP3 million per year. The Argentine government will charge a 30 percent tax rate on profits. All after-tax profits each year will be remitted to the U.S. parent, and no additional taxes are owed on those funds. The spot rate of the AP is currently $0.20. The AP is expected to depreciate by 10 percent each year for the next four years. The salvage value of the proposed project’s assets will be worth AP40 million in four years after Nebraska pays capital gains taxes. The initial investment will require $12 million, half of which will be in the form of equity from the U.S. parent and half of which will come from borrowed funds. Nebraska will borrow the funds in $\text{AP}$, at an annual interest rate of 14 percent. Annual interest (and zero principal) is paid on the debt at the end of each year, and the interest payments can be deducted before determining the tax owed to the Argentinean government. The firm will pay the entire principal of the loan at the end of year 4. Nebraska requires a rate of return of at least 20 percent on its invested equity for this project to be worthwhile. Determine the NPV of this project. Should Nebraska pursue the project?