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 1 year ago
Next > < Previous

Related 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 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...
.   Suppose your firm is considering investing in a project with the cash flows shown as...
.   Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. Time 0 1 2 3 4 5 Cashflow -100,000 30,000 45,000 55,000 30,000 10,000 Calculate the payback and use the payback decision rule to evaluate this...
A firm is considering investing in a new project. According to its cost of capital while...
A firm is considering investing in a new project. According to its cost of capital while using debt, preferred stock and new common stock, the project is expected to have an initial after-tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4. A firm has determined its optimal capital structure, which is composed of the following sources...
A firm is considering investing in a new project. According to its cost of capital while...
A firm is considering investing in a new project. According to its cost of capital while using debt, preferred stock and new common stock, the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4. A firm has determined its optimal capital structure, which is composed of the following...
A firm is considering investing in a new project. According to its cost of capital while...
A firm is considering investing in a new project. According to its cost of capital while using debt, preferred stock and new common stock, the project is expected to have an initial after-tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4. A firm has determined its optimal capital structure, which is composed of the following sources...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent. Time: 0 1 2 3 4 5 6 Cash flow: –$8,600 $1,080 $2,280 $1,480 $1,480 $1,280 $1,080 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) IRR%= Should it be accepted or rejected?
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$7,600 $1,190 $2,390 $1,590 $1,590 $1,390 $1,190 Use the NPV decision rule to evaluate this project. (Negative amount should be indicated...
Suppose your firm is considering investing in a project with the cash flows shown as follows,...
Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. Time 0, 1, 2, 3, 4, 5 Cash Flow: -125,000/ 65,000, 78,000, 105,000, 105,000, 25,000 Use the NPV decision rule to evaluate this project; should it be...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,150 30 570 770 770 370 770 Use the discounted payback decision rule to evaluate this project; should it be accepted...
Suppose your firm is considering investing in a project with the cash flows shown below, that...
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$5,200 $1,250 $2,450 $1,650 $1,570 $1,450 $1,250 Use the payback decision rule to evaluate this project. (Round your answer to 2...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT