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Dennison, Texas cell-phone giant Cellular Two is evaluating a proposal to manufacture and sell digital phones in Great Britain. The project will require an initial investment of £200 million to acquire and recondition the manufacturing plant in Manchester where the phones will be produced. The project will generate expected future after-tax cash inflows of £60 million at the end of each year during a 3-year project life. At the end of three years the manufacturing facility will be sold to British Cellular, generating after-tax proceeds of £150 million. The spot exchange rate is $1.6000/£1. The risk-free interest rate in the United States is 1.25 percent per year. The pound-denominated risk-free rate in Great Britain is 2.75 percent per year. Assuming that Cellular Two’s overseas after-foreign-tax profits can be repatriated to the US without further tax liability and that Cellular Two has a 14 percent required return, determine the net present value for the project.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M91381773

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