Question

One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies Consider this case: LeBron Development Inc. is a U.S. firm evaluating a project in Australia. You have the folowing information about the project .The project requires an investment of AU$1,340,000 today and is expected to generate cash flows of AU$900,000 at the end of eacha of the next two years. The current exchange rate of the U.S. dollar against the Australian dollar is $0.7823 per Australian dollar (AUS) The one-year forward exchange rate is $0.8102/ AUS, and the two-year forward exchange rate is $0.8412 / AUS. The firm's weighted average cost of capital (WACC) is 10% , and the project is of average risk. What is the dollar-denominated net present value (NPV) of this project? O $264,325 O $276,339 O $240,295 $288,354 There are three major types of international credit markets. Read the following statement and then indicate which type of international credit market is being described. What is the dollar-denominated net present value (NPV) of this project? $264,325 $276,339 O $240,295 $288,354 There are three major types of international credit markets. Read the following statement and then indicate which type of international credit market is being described. Nitreca Chemicals Inc., a British company, issued U.S. dollar-denominated bonds in Chicago to fund its U.S. operations. Foreign bond Eurocredit Eurobond

Answer 1

Net present value (NPV) dollars denominated = Present value (P. V) of cash inflow - Cash outflow

Here,

i) P. V. of cash inflow (in dollar) = Cash flow in dollar year 1 * (1 / (1 + i)^n) + Cash flow in dollar year 2 * (1 /(1 + i)^n)

Here,

Cash flow in dollar year 1 = Year 1 Cash flow * One year exchange rate

Caah flow in dollar year 1 = AU$9,00,000 * $0.8102 per AU$ = $7,29,180

Cash flow in dollar year 2 = Year 2 Cash flow * Two year exchange rate

Cash flow in dollar year 2 = AU$9,00,000 * $0.8412 per AU$ = $7,57,080

i (WACC rate) = 10% or 0.10

n = years

Now,

P. V. Of cash inflow (in dollar) = $7,29,180 * (1/(1+0.10)^1) + $7,57,080 * (1/(1+0.10)^2)

P. V of cash inflow (in dollar) = ($7,29,180 * 0.9091) + ($7,57,080 * 0.8265)

P. V. Of cash inflow (in dollar) = $6,62,897.54 + $6,25,726.62

P. V. Of cash inflow (in dollar) = $12,88,624.16

ii) Cash outflow (in dollar) = Project cost * Current exchange rate

Cash outflow (in dollar) = AU$13,40,000 * $0.7823

Cash outflow (in dollar) = $10,48,282

iii) NPV = $12,88,624.16 - $10,48,282

NPV = $2,40,342.16

Answer : $2,40,295

Note : There is difference in answer is due decimal rounding off.