Moon Rhee Auto Supply, a Korean supplier of parts to Kia Motors, is evaluating an opportunity to set...

Question

Moon Rhee Auto Supply, a Korean supplier of parts to Kia Motors, is evaluating an opportunity to set up a plant in Alabama, where Kia Motors has an auto assembly plant for its SUVs. The cost of this plant will be $13.5 million. The current spot rate is 1, XXXXXXXXXXKorean won per U.S. dollar. The firm is expected to use this plant for the next five years and is expecting to generate the following cash flows:

Year

1

2

3

4

5

Cash flows (S millions)

$2.3

$4.2

$3.6

$5.8

$7.6

Expected exchange rate

(Korean won/S)

1,105.231

1,115.632

1,146.155

1,120.221

1,110.670

The firm uses a discount rate of 9 percent for projects like this in the United States.
What is the NPV of this project? Should Moon Rhee Auto Supply take on this project?

Robert · Accepted Answer

SOLUTION:
Year 
Cash Flows (in 
millions of U.S. $) 
Exchange Rate 
(won/$) 
Cash Flows (in 
millions of won) 
0 (13.5) 1.120.318 (15,124,293) 
1 2.3 1,105.234 2,542,029 
2 4.2 1,115,632 4,685,654 
3 3.6 1,146,155 4,126,158, 
4 5.8 1,120,221 6,497,276 
5 7.6 1,110.670 8,441,

Moon Rhee Auto Supply, a Korean supplier of parts to Kia Motors, is evaluating an opportunity to set up a plant in Alabama, where Kia Motors has an auto assembly plant for its SUVs. The cost of this...

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