International Business Finance Evaluation

The initials investment evaluation

Academically, preferable method of evaluating investment project is net present values method1, thus bank in Hong Kong required our project must show a positive net present value after five years.

The net present value of both Singapore and Indonesia 5-years project are positive. (SEE APPENDIX)Based on calculation, it is worth to invest in both Singapore and Indonesia, but NPV are relatively small compared to the original investment (HK$ 0.178 million in Singapore &1.14million in Indonesia).

There are some limitations of net present value calculation. The project only is evaluated over 5 years. A longer period may show the project in a completely different light, and would be more realistic for a project of this nature. The first 5 years cash flow is generated under estimation. How confident are we of their accuracy? Just little bit changes in cash flow; all results calculated will be differenced.

Also, the future spot rates where estimated on the basis of the Purchasing Power Parity Theory (PPP). How realistic is this? Exchange rates are influenced by much more than just inflation. Exchange rates may be influenced by many reasons, like a country's interest rates, the world economy, national income, political changes or government economic and fiscal policy.

How relevant is the cost of capital used? Will the company's cost of capital change as a result of the overseas venture? It will depend largely upon investors view the risks involved. It may rise if they feel that investment in either Singapore or Indonesia is risky. It may fall if they feel that it is not risky.

The net present value will change if incorrect estimation of original capital outlay, project cash flow and future exchange rates.

Original capital outlay changes

Let me analysis what will be NPV changed if original capital outlay estimation is wrong. A principal cash outflow associated with the project is original capital outlay, consisting of the plant purchases, equipment expenditures and working capital requirements. Initial capital outlay previous estimated are $600000 and 1650million for Singapore and Indonesia respectively.

1. Net present value (NPV) means the present value of future cash flows discounted at the project's cost of capital minus the initial net cash outlay for the project.

As table shown below, if initial capital outlay rise 6% of Singapore and 76% of Indonesia, both project's net present value will go down to zero. That means such investment is not worth to do. Comparing two projects, investing in Indonesia is more recommendable because sensitivity of initial capital outlay changes is much less that Singapore.

SINGAPORE

Year

0

1

2

3

4

5

Cash Flow (SIN$)

-635633.4

130000

170000

190000

210000

230000

Spot Rates

0.2

0.1963

0.1927

0.1891

0.1856

0.1822

Cash Flow (HK$)

-3178167

662251.7

882200.3

1004759

1131466

1262349

Discount Factor 15%

1

0.8696

0.7561

0.6575

0.5718

0.4972

Present value

-3178167

575894

667031.7

660629.3

646972

627640

Net Present Value =

0

635633.4

-

600000

=

6%

↑

　

600000

　

INDONESIA

Year

0

1

2

3

4

5

Cash Flow (Rupiah$)

-2906.86

700

900

1000

1100

1200

Spot Rates

1100

1133

1167

1202

1239

1276

Cash Flow (HK$)

-2.6426

0.6178

0.7712

0.8319

0.8878

0.9404