Problem:

An American firm is evaluating an investment in Mexico. The project will require purchasing equipment from a variety of sources and shipping it to Mexico. The projected cost of buying the equipment and shipping it is $3.7 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $1,700,000 each year in the U.S. and the costs of the project are projected to be 6 million pesos each year for the 5 years. If taxes are 35%, the appropriate discount rate is 9% and you use the current exchange rate for pesos:

Required:

Question 1: Calculate the NPV in U.S. dollars.

Question 2: Calculate the NPV in Mexican pesos.

Note: Please provide equation and explain comprehensively and give step by step solution.