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. ...