Question

International Financial Management Quiz Ch 14 (10 pts) ot of a subsidiary in Norway. The initial investment would terminate the project after four as Baps' existing projects. All cash flows the end of each year. Listed below are the estimated Croiect's lifetime in Norwegian kroner (NOK): Year 3 Year 4 Yr 0 NOK 17,000,000 NOK 20,000,000 Year 1 NOK-44,450,000 NOK10,000,000 35. Baps' exchange rate forecast for the Norwegian The current exchange rate of the Norwegian kroner is $. 135. Baps exchange rate forecast for the kroner over the project's lifetime is listed below: Year Year 4 Year 2 Year o Year 1 $0.155 $0.155 $0.135 $0.145 $0.145 Assume that Baps Corporation is considering the es Corporation is considering the establishment of a subsidiary in Non. red by the parent is NOK 4 If the project is undertaken, baps would terminate the Baps cost of capital is 12 and the project is of the same as aps existing proiecte generated from the proiect will be remitted to the parem cash flows the Norwegian subsidiary will generate ove Year 2 NOK 15,000,000 1. (3 pts) What is the net present value in US$) of the Norwegian project? NPV = $. 2. (2 pts) What would be the result of the NPV if the funds from the project in year 1, 2, and 3 were blocked and money could not be remitted back to the parent company until year 4. Assume the cash generated by the proiect from years 1.2 and 3 can be reinvested into Norway Bonds earning 15% interest per years? a. NPV would decrease b. NPV would stay the same C. NPV would increase

Answer 1

0 Calculation of Net Present value Net Present value = P. r. of Cash Inflow - P. v. of Cash outflow - Year Cash flows (NOK) 0 (44,450,000) 10,000,000 2 15,000,000 3 17,000,000 4 20,000,000 Remmitted Amt (NOK X USD Rate) 6000, 750 14,50.000 21,75,000 26,35,000 31,00,000 forvifactor [@ 12% 1 0,893 0.7977 0.72 0.636 Present value (60.00, 750) 1294,850 17, 33,475 18,76, 120 19,71, 600 NPV 875295* " NPV = L 12,94,850 + 17,33,475 + 18,76, 120 + 19,71,600] - [60,00, 750] = 8,75,295 (in us Dollars)

Page No.: 12 Calulation of NPV of the amount is not demitted to parent company and invested in Bonds a 15% interest per year -

Stop! - Calculation of amount at the end of the project. Years Opening Interest Cash Inflow Closing (Balance at (at the end Balance - opening of year) of the year) 10,000000 26,500,000 47.475,000 74,596,250 2 - 15,00,000 39,75,000 71.21,250 111,89,437 10,000,000 15,000,000 17,000,000 20,000,000 10,000,000 26,500,000 47,475,000 74,596,250 85,785,687 4 Conversion of Closing Balance into US Dollass. u Closing Cash Balance = 85,785,687 X 0.155 ( In flow) =1329 6781

Page No. : Present value of closing Balance in us Dollars 0.636 = 132967810 - 84,56,753 Therefore, NPV = 84,56,753 - 60,00,750 = 24,570,003 to These fore, by not remmitting the amount parent company, NPV will increase by 15,80 708.