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Consider the following assumptions for a capital budgeting project.

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Consider the following assumptions for a capital budgeting project. The firm is located in Russia and plans to sell its products to India: Fixed capital investment is 20,000,000 Rub; no investment in net working capital is required. The project has an expected five-year life (Year 0 + 5 years of operations). The fixed capital is depreciated straight-line to zero over a five-year life. Unit sales in Year 1 are normally distributed with a mean of 2,000 and a standard deviation of 200. Unit sales growth after Year 1 is normally distributed with a mean of 4 percent and standard deviation of 6 percent. Assume the same sales growth rate for Years 2–5. The sales price is 3500 Indian Rupee per unit, normally distributed with a standard deviation of 250 Rupee per unit. The same price holds for all five years. Estimate the distribution of exchange rate using historical data for 2001-2020 from Russian Central Bank web-site https://cbr.ru/eng/currency_base/dynamics/ . To find the mean exchange rate in 2021 you can extrapolate average historical growth rate or use exchange rate forecast for 2021 of trustworthy external sources. Describe the method you applied to find the mean exchange rate in 2021 and include the link to external data sources if you used them. Cash operating expenses as a percentage of total revenue in Rubles are normally distributed with a mean and standard deviation of 30 percent and 3 percent, respectively. The annual discount rate is 12 percent and the tax rate is 20 percent.

Solve the following exercises using MS Excel. (Example is attached as a file)

1. Draw the financial model of the project assuming the investments will be made by the end of 2020 (Year 0) and the firm will start operating in 2021. The model should include revenue in Rupees and revenue in Rubles. All other variables except unit sales prices should be in Rubles. You should draw two versions of the model: one with expected values of all input variables and one with random variables generated from distribution parameters described above.

2. What are the NPV, IRR, payback period and discounted payback period (rounded to months: answer should be written like “2 years 9 months”) using the expected values of all input variables?

3. Perform a simulation analysis (10 000 iterations recommended, in case you experience technical difficulties, number of iterations can be reduced) and provide probability distributions for the NPV. Draw the histogram of its distributions. What is the probability of having negative NPV?

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