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Answer to Question #7231 in Finance for LaMarcus Streeter

Question #7231
5. Chen Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?

a. $1.01 million
b. $2.77 million
c. $3.09 million
d. $5.96 million
e. $7.39 million
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Comments

Shelly
11.03.12, 20:31

NPV = -$10.0 + + + + +
= -$10.0 + $2.75862 + $2.37812 + $3.07516 + $2.65100 + $1.90445
= $2.76735  $2.77 million.

Financial calculator solution (In millions):
Inputs: CF0 = -10.0; CF1 = 3.2; Nj = 2; CF2 = 4.8; Nj = 2; CF3 = 4.0;
I = 16.
Output: NPV = $2.767  $2.77 million.
Expert can verify

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