# 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&#039;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&rsquo;s NPV? a. \$1.01 million b. \$2.77 million c. \$3.09 million d. \$5.96 million e. \$7.39 million
1
2012-03-13T08:13:22-0400

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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