Question

Problems: 1. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 1270, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 $.13 Year 2 $.14 Year 3 $.12 Year 4 $.15 Year 1 Year 2 Year 3 Year 4 (a) Complete the following table Year 0 Cash flow to parent (US$) PV of parent cash flow (US$) (b) What is the NPV of the project?

Assume that Baps Corporation is considering the establishment of a subsidiary in

Norway. The initial investment required by the parent is $6,000,000. If the project is

undertaken, Baps would terminate the project after four years. Baps' cost of capital is 12%,

and the project is of the same risk as Baps' existing projects. All cash flows generated

from the project will be remitted to the parent at the end of each year. Listed below are the

estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in

Norwegian kroner (NOK):

Answer 1

C1 В D G Formula Cash flow in $ Value Formula PV of cash flow @12% =ROUND ( (D3*G3),2) =ROUND((D4*G4), 2) =ROUND((D5*G5), 2) =ROUND((D6*G6),2) ESUM(н3:нб) Value PV of cash flow @12% 1160714.29 1 Discount factor Cash flow in NOK Cash flow in $ Exch rate 2 Year |-1/1.12 G3/1.12 10000000 1300000 ЕC3*F3 0.13 3 Year1 1674107.14 15000000 C4 F4 4 Year2 2100000 0.14 1452031.71 17000000 -C5*F5 -C6*F6 0.12 G4/1.12 2040000 5 Year3 0.15 1906554.24 3000000 G5/1.12 20000000 6 Year4 6193407.38 7 Initial Investment -6000000 -6000000 193407.38 H7+H8 9 NPV 10 11