Assume that BAPS Corporation is considering the establishment of a subsidiary in Norway. The initial investment...

Assume that BAPS Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $10 million. If the project is undertaken, BAPS would terminate the project after four years. Their cost of capital is 13%, 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

NOK20,000,000 NOK30,000,000 NOK34,000,000 NOK40,000,000

The current exchange rate of the Norwegian kroner is $0.135. BAPS’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:

Year 1 Year 2 Year 3 Year 4

$.13 $.14 $.12 $.15

What is the net present value of the Norwegian project? What is the investment decision? (10)

Expert Solution

Initial investment	$10 million
Cost of capital	13%

	Year
Particulars	1	2	3	4
Cash flows (NOK)	2,00,00,000.00	3,00,00,000.00	3,40,00,000.00	4,00,00,000.00
Exchange rate forecast ($/NOK)	0.13	0.14	0.12	0.15
Cash flows (US$)	26,00,000.00	42,00,000.00	40,80,000.00	60,00,000.00
PVF @ 13%	0.88496	0.78315	0.69305	0.61332
PV of Cash flow in US$	23,00,884.96	32,89,216.07	28,27,644.66	36,79,912.37

PV of cash inflow	1,20,97,658.05	----(1)
Initial Investment	1,00,00,000.00	----(2)
NPV in US $	20,97,658.05

Investment decision: Since the NPV is positive, the Norwegian project must be accepted.

jeff jeffy answered 1 year ago

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