Question

Assume the company that you work for is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, the company that you work for would terminate the project after four years. The company that you work for has a cost of capital is 13 percent, and the project has the same risk as other existing projects. In addition, the project has a salvage value of NOK 5,000,000 at the end of year 4, while the book value of the project at the end of year 4 is NOK 3,000,000. Assume Norwegian tax rate is 21%, which is the same as in the US. 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 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK17,000,000 The current exchange rate of the Norwegian kroner is $.135. You forecast exchange rate for the Norwegian kroner over the project's lifetime are listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 What is the net present value of the Norwegian project?.

Answer 1

We can calculate the Net Present Value of Norwegian project in Dollars using the excel sheet

Formulas used in the excel sheet are

So the NPV of the Norwegian project in US dollars comes out to be $ 1,194,186.

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