Exhibit 30 (This relates to question below) Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project after four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps'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 1 NOK10,000,000 Year 1 Year 2 $.13 NOK15,000,000 Year 2 Year 3 The current exchange rate of the Norwegian kroner is $.135. Baps's exchange rate forecasts for the Norwegian kroner over the project's lifetime are listed below: $.14 NOK17,000,000 Year 3 Year 4 $.12 NOK20,000,000 Year 4 $.15 Refer to Exhibit 30. What is the net present value of the Norwegian project?

Exhibit 30 (This relates to question below) Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project after four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps'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 1 NOK10,000,000 Year 1 Year 2 $.13 NOK15,000,000 Year 2 Year 3 The current exchange rate of the Norwegian kroner is $.135. Baps's exchange rate forecasts for the Norwegian kroner over the project's lifetime are listed below: $.14 NOK17,000,000 Year 3 Year 4 $.12 NOK20,000,000 Year 4 $.15 Refer to Exhibit 30. What is the net present value of the Norwegian project?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 22P

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Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' 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 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $0.13/NOK $0.14/NOK $O.12/NOK $0.15/NOK What is the net present value and internal rate of return on the Norwegian project?
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