Bailey Communication, an American multinational is evaluating a proposed acquisition of a new satellite system in...

Bailey Communication, an American multinational is evaluating a proposed acquisition of a new satellite system in Italy that will boost its transmission area in Europe. The satellite system is expected to cost €25 million. The project life is for the next 4 years in which the new satellite system is expected to provide cashflows of €17.25 million per year.

The spot exchange rate is €0.95 per U.S. dollar across the life of the project. The project’s cost of capital which includes a foreign exchange risk premium is 10 percent.

a) Calculate the projects U.S. dollar denominated net present value (NPV)?

b) If U.S dollar is expected to strengthen annually by 0.2 percent. Calculate the revised NPV if the cost is revised to 11%?

c) Based on part (a), all else remains. Bailey Communication is considering revising its current cost of capital to include the increase in risk premium due to political uncertainty in Italy. The revised cost of capital now becomes 18 percent. Calculate Bailey’s new NPV with the new cost of capital.

d) Comparing the NPV calculations from part (a) to (c), why do you think that the multinational company’s average cost of capital higher or lower than their domestic counterparts?

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jeff jeffy answered 1 year ago

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