Anderson International Limited is evaluating a project in Erewhon. The project will create the following Cash Flow -$ 1,785,000 Year: 0 1 2 3 4 610,000 707,000 580,000 483,000 All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are "blocked" and must be reinvested with the government for one year. The reinvestment rate for these funds is 4 percent. Assume Anderson uses a required return of 11 percent on this project. a. What is the NPV of the project? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the IRR of the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

Anderson International Limited is evaluating a project in Erewhon. The project will create the following Cash Flow -$ 1,785,000 Year: 0 1 2 3 4 610,000 707,000 580,000 483,000 All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are "blocked" and must be reinvested with the government for one year. The reinvestment rate for these funds is 4 percent. Assume Anderson uses a required return of 11 percent on this project. a. What is the NPV of the project? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the IRR of the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 18QA

See similar textbooks

Similar questions

Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up. Year 0: -64,000 Euros Year 1: 160,000 Euros Year 2: -100,000 Euros The current exchange rate is $1.60 = 1 Euro. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S. -based firm for a domestic project of this risk is 8 percent. Find the dollar cash flows to compute the dollar - denominated NPV of this project. And also find the euro - zone cost of capital.
Consider the following international investment opportunity. It involves a gold mine that can be opened at a cost, then produces a positive cash flow, but then requires environmental clean-up. Year 0 + -€64,000 Year 1 Year 2 €160,000 -€100,000 The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 6 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. Find the euro-zone cost of capital. Write it down in percent with two decimals places.
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etemadi's corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are shown here: Year 1 2 3 Free Cash Flow (E million) 0 -15 1 8.9 9.5 11.7 You know that the spot exchange rate is $0.87/€. In addition, the risk-free interest rate on dollars is 3.9% and the risk-free interest rate on euros is 56%. Assume that these markets are internationally integrated and the uncertainty in the free cash flows is not correlated with uncertainty in the exchange rate. You determine that the dollar WACC for these cash flows is 8.4%. What is the dollar present value of the project? Should Etemadi Amalgamated undertake the project? (Enter all outflows of cash as negative numbers.)
The management of Kawneer North America is considering investing in a new facility and the following cash flows are expected to result from the investment: A. What is the payback period of this uneven cash flow? B. Does your answer change if year 10s cash inflow changes to $500,000?
Synergy Incorporated, a US based Multinational Company (MNC) manufacturing electrical appliances. The company currently having problem of increasing in labor cost and therefore it affects the company's has profit. The company has decided to reduce the cost. The Board of Directors is considering building a plant in South East Asia, Singapore and Indonesia are countries under consideration. Below are the estimatedcash flow and exchange rate for both countries. Singapore Indonesia Forecasted Cash Flow Forecasted Exchange Year Cash Flow (IND) Exchange (SGD) (USD/SGD) (USD/IDR) 2017 (300,000) SGD4.4852 (5,200,000) IDR49.582 2018 65,000 SGD4.0614 1,500,000 IDR49.9648 2019 52,000 SGD4.1323 1,600,000 IDR52.4211 2020 60,000 SGD4.0905 1,800,000 IDR50.6107 2021 75,000 SGD4.4028 2,500,000 IDR51.3034 Based on the information, compute the potential investment's net present value (NPV) for Singapore and Indonesia if the company has weighted cost of capital of 10 and 12 percent. Suggest which location…
Golden Ltd is an exporting company and it will have receivables in Malaysian ringgit in coming years. It expects the Malaysian ringgit to depreciate against the US dollar over time. It wants to get rid of its transaction exposure by denominating the exports in US dollars but that it is still subject to operating exposure. The long-term hedging techniques are constrained and it does not know how much Malaysian ringgit it will receive in the future, so it is difficult even if a long-term hedging method was available. How can Golden Ltd lessen its exposure in the case?
A U.S.-based MNC has a subsidiary in Malaysia that generates substantial net cash inflows denominated in Ringgit Malaysia. Given this information, the MNC would ____ from a ____ of the Ringgit Malaysia. A. benefit; appreciation B. not benefit; depreciation C. benefit; depreciation D. not benefit; appreciation
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with a salvage value of $12,000,000. This salvage value would be paid by the government in Singapore to Kittle in exchange for ownership of the subsidiary. The expected exchange rate of the Singapore dollar of $0.50 over the life of the project. Kittle managers are worried about the uncertainty of the value of the Singapore dollar. While they expect that the exchange rate will be $0.50, they recognize that this value may fluctuate. Thus, they decide to S$3,000,000 in cash flows per year, while any additional cash flows beyond this threshold would not be hedged. The forward rate that Kittle will use to hedge the S$3,000,000 is $0.48. The following table shows a key subsection of Kittle's capital budgeting analysis…
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with a salvage value of $12,000,000. This salvage value would be paid by the government in Singapore to Kittle in exchange for ownership of the subsidiary. The expected exchange rate of the Singapore dollar of $0.50 over the life of the project. Kittle managers are worried about the uncertainty of the value of the Singapore dollar. While they expect that the exchange rate will be $0.50, they recognize that this value may fluctuate. Thus, they decide to S$3,000,000 in cash flows per year, while any additional cash flows beyond this threshold would not be hedged. The forward rate that Kittle will use to hedge the S$3,000,000 is $0.48. The following table shows a key subsection of Kittle's capital budgeting analysis…
Last year, the Government of Ghana announced a new government policy dubbed Gold for Oil (G4O). The policy, as explained by the government, is to allow the government to pay for imported oil products with gold, in a direct barter with gold purchased by the Central Bank. The move, announced by the Vice President in the midst of the depreciation of the cedi against the US dollar and the rising cost of fuel prices, was explained as an intervention to help stabilise prices of fuel products, as well as reduce pressure on Ghana’s foreign exchange, as the direct gold barter would be the mode of paying for imported oil instead of depleting the foreign exchange reserve. The Gold for Oil programme has since been implemented. As Energy Expert Group with good understating of derivatives in the oil and gas market, discuss the Policy in the context of Derivatives. What is/are the derivative(s) being used?
Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain.
(6)(a)Identify the revenue and cost related motives for direct foreign investment. (b)Suppose a U.S. based MNC plans to invest in a new plant either in the U.S or in Zambia. The MNC intends to invest 30% of its investment spending in this new plant while the remainder is devoted to the firm's existing structure in the U.S. The characteristics of the proposed new project are given below: If located in U.S If located in Zambia Mean expected annual returns on investment 25% 25% Standard deviation of expected annual returns on investment 0.09 0.11 Correlation of expected annual returns on investment with returns on prevailing U.S business 0.80 -0.05 Determine, with robust quantitative explanation, which location will best provide the firm with a more stable flow of revenue.