Reference no: EM133108556

Question - You are a senior financial analyst with IBM in its capital budgeting division.  IBM is considering expanding in Australia due to its positive business atmosphere and cultural Similarities to the United States.

The new facility would require an initial investment in fixed assets of 5 billion AUD, and an additional capital investment of 3% would be required each year in years 1 to 4.  All capital investment would be depreciated straight line over the five years that the facility would operate.  First-year revenues from the facility are expected to be 6 billion AUD and grow at 10% per year.  Cost of goods sold would be 40% of revenue; the other operating expenses would amount to 12% of revenue.  Net working capital requirements would be 11% of sales and would be required the year prior to the actual revenues.  All net working capital would be recovered at the end of the fifth year.  Assume that the tax rates are the same in the two countries, that the two markets are internationally integrated, and that the cash flow uncertainty of the project is uncorrelated with changes in the exchange rate. Your team manager wants you to determine the NPV of the project in U.S. dollars using a cost of capital of 12%.