B&G Co. is planning a project in France. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the U.S. The project would end in one year, when all earnings would be remitted to B&G Co. Assume that no additional corporate taxes are incurred beyond those imposed by the French government. Since B&G Co. would rent space, it would not have any long-term assets in France, and expects the salvage (terminal) value of the project to be about zero. Assume that the project’s required rate of return is 25 percent. Also assume that the initial outlay required by the parent to fill the store with clothes is $320,000. The pretax earnings are expected to the €650,000 at the end of one year. The euro is expected to be worth $1.21 at the end of one year, when the after-tax earnings are converted to dollars and remitted to the United States. The following forms of country risk, which are independent, must be considered: * The French economy may weaken (probability = 55%), which would cause the expected pretax earnings to be €450,000. * The French corporate tax rate on income earned by U.S. firms may increase from 30 percent to 40 percent (probability = 35 percent).     What is the expected NPV of the project?   What is the probability that the project’s NPV

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

B&G Co. is planning a project in France. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the U.S. The project would end in one year, when all earnings would be remitted to B&G Co. Assume that no additional corporate taxes are incurred beyond those imposed by the French government. Since B&G Co. would rent space, it would not have any long-term assets in France, and expects the salvage (terminal) value of the project to be about zero.

Assume that the project’s required rate of return is 25 percent. Also assume that the initial outlay required by the parent to fill the store with clothes is $320,000. The pretax earnings are expected to the €650,000 at the end of one year. The euro is expected to be worth $1.21 at the end of one year, when the after-tax earnings are converted to dollars and remitted to the United States. The following forms of country risk, which are independent, must be considered:

* The French economy may weaken (probability = 55%), which would cause the expected pretax earnings to be €450,000.

* The French corporate tax rate on income earned by U.S. firms may increase from 30 percent to 40 percent (probability = 35 percent).

 
 

What is the expected NPV of the project?

 
What is the probability that the project’s NPV will be negative
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Country or Sovereign Risk
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education