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Question
Use the following information to answer questions 10-12.
General Candy, Inc., a U.S. firm, manufactures and sells candies worldwide. Because of a rising price of sugar in the U.S., the company is considering to build a new plant in the U.K. The plant will cost 15 million to build. Assume that the plant will have a life of 3 years before it is confiscated by the British government (zero salvage value) and the discount rate of the cash flows is 10%. Consider the following cash flows for this project.
Table 9.1:
| Year 0 | Year 1 | Year 2 | Year 3 | |
| U.K. | ||||
| Net cash flows (in pound) | -15.0 | 5 | 7.5 | 7.5 |
| Forecast exchange rate ($/) | 1.5 | 1.46 | 1.45 | 1.44 |
| Discount rate = 10% |
Comparing with information in Table 9.1, if the forecast exchange rate ($/) remains constant at $1.5 per pound throughout the life of the project, which of the following is true?
a. The net present value of this project increases.
b. The net present value of this project decreases.
c. The net present value of this project becomes negative.
d. The net present value of this project remains unchanged.
Answer
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