Question

Assume that Bach Corporation is considering the establishment of a subsidiary in Norway. The initial Norwegian Kroner investment required by the parent​ (in Year​ 0) is Kr​ 40,000,000. If the project is​ undertaken, Bach would terminate the project after four years. ​Bach's cost of capital is

​16%​,

and the project is of the same risk as​ Bach’s 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 0 Year 1 Year 2 Year 3 Year 4

​-NOK40,000,000 ​ NOK10,000,000 ​ NOK15,000,000 ​ NOK17,000,000 ​ NOK20,000,000

The current exchange rate of the Norwegian kroner is​ Kr8.3253/$. Bach’s exchange rate forecast for the Norwegian kroner over the​ project's lifetime​ (in kroner per​ dollar) is listed​ below:

Year 0 Year 1 Year 2 Year 3 Year 4

8.3253 7.6923 7.1428 6.8965 6.6666

What is the NPV of the project in​ USD?

A.

​$933,487

B.

​$1,112,836

C.

​$1,323,455

D.

​$1,538,788

Answer 1

Correct Answer Is B NPV = $1,112,836.56