A US firm is considering an investment in Tanzania, which will cost TZS200 million and is expected to produce an income of TZS30 million in real terms in each of the next 7 years. The firm estimates that the appropriate cost of capital for the project is 8%. Annual interest rates are 9% in Tanzania, 7⅞% in the US, the spot exchange rate is TZS1354.50 per US$, and inflation in Tanzania is expected to average 6% per year. At the end of the seventh year the US firm expects to sell the Tanzanian investment to a local firm for TZS50 million.
You have been selected as the firm’s financial analyst and you have been assigned the task of supervising the international capital budgeting analysis. Evaluate and comment on the economic viability of the proposed project using the NPV method applying the following techniques:
Centralized Capital Budgeting and
Decentralized Capital Budgeting Techniques)