Question
In: Accounting
Your US-based firm is considering investing in a project run by its Canadian subsidiary. This project...
Your US-based firm is considering investing in a project run by its Canadian subsidiary. This project will cost CAD 26M to set up today and will pay out CAD 29M in one year. This project will be all equity financed, with the parent firm taking a 70% equity stake, and the Canadian subsidiary will be taking a 30% equity stake. The spot rate is currently USD 0.77 per CAD, and you expect that it will be USD 0.84 per CAD in one year. Your USD discount rate for projects in First World foreign countries is 14%, and your Canadian subsidiary’s discount rate for domestic projects is 13%
a.What is the NPV of this project from the parent perspective?
b.What is the NPV of this project from the project perspective?
Solutions
Expert Solution
| S No | Particulars | Cash Flow (CAD) | Present Value Factor @ 13% | Present Value Factor @ 14% | Discounted Cash Flow @ 13% (CAD) | Discounted Cash Flow @ 14% (CAD) | Exchange Rate | Discounted Cash Flow @ 14% (USD) |
| 0 | Investment | $ -2,60,00,000.00 | 1.0000 | 1.0000 | $ -2,60,00,000.00 | $ -2,60,00,000.00 | 0.77 | $ -2,00,20,000.00 |
| 1 | Pay out | $ 2,90,00,000.00 | 0.8850 | 0.8772 | $ 2,56,63,716.81 | $ 2,54,38,596.49 | 0.84 | $ 2,13,68,421.05 |
| $ -3,36,283.19 | $ -5,61,403.51 | $ 13,48,421.05 |
a) NPV from the parent perspective = $ 1,348,421.05
b) NPV from the subsidiary perspective = $ - 336,283.19
ekkarill92 answered 2 years agoRelated Solutions
Your US-based firm is considering investing in a project run by its Canadian subsidiary. This project...
Your US-based firm is considering investing in a project run by
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all equity financed, with the parent firm taking a 70% equity
stake, and the Canadian subsidiary will be taking a 30% equity
stake. The spot rate is currently USD 0.77 per CAD, and you expect
that it will be USD 0.84 per CAD...
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Time
0
1
2
3
4
5
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1
2
3
4
5
6
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1
2
3
4
5
6
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