Tovar Co. is a U.S. firm that has beenasked to provide consulting services to help Grecia Co.(in Greece) improve its performance. Tovar wouldneed to spend $300,000 today on expenses related tothis project. In one year, Tovar will receive paymentfrom Grecia, which will be tied to Grecia’s performanceduring the year. There is uncertainty about Grecia’sperformance and about Grecia’s tendency forcorruption.Tovar expects that it will receive 400,000 euros ifGrecia achieves strong performance following theconsulting job. However, there are two forms of coun-try risk that are a concern to Tovar Co. There is an80 percent chance that Grecia will achieve strong per-formance. There is a 20 percent chance that Grecia willperform poorly, and in this case, Tovar will receive apayment of only 200,000 euros.While there is a 90 percent chance that Grecia willmake its payment to Tovar, there is a 10 percentchance that Grecia will become corrupt, and in thiscase, Grecia will not submit any payment to Tovar.Assume that the outcome of Grecia’s performance isindependent of whether Grecia becomes corrupt. Theprevailing spot rate of the euro is $1.30, but Tovarexpects that the euro will depreciate by 10 percentin one year, regardless of Grecia’s performance orwhether it is corrupt.Tovar’s cost of capital is 26 percent. Determinethe expected value of the project’s net present value.Determine the probability that the project’s NPVwill be negative.
Tovar Co. is a U.S. firm that has beenasked to provide consulting services to help Grecia Co.(in Greece) improve its performance. Tovar wouldneed to spend $300,000 today on expenses related tothis project. In one year, Tovar will receive paymentfrom Grecia, which will be tied to Grecia’s performanceduring the year. There is uncertainty about Grecia’sperformance and about Grecia’s tendency forcorruption.Tovar expects that it will receive 400,000 euros ifGrecia achieves strong performance following theconsulting job. However, there are two forms of coun-try risk that are a concern to Tovar Co. There is an80 percent chance that Grecia will achieve strong per-formance. There is a 20 percent chance that Grecia willperform poorly, and in this case, Tovar will receive apayment of only 200,000 euros.While there is a 90 percent chance that Grecia willmake its payment to Tovar, there is a 10 percentchance that Grecia will become corrupt, and in thiscase, Grecia will not submit any payment to Tovar.Assume that the outcome of Grecia’s performance isindependent of whether Grecia becomes corrupt. Theprevailing spot rate of the euro is $1.30, but Tovarexpects that the euro will
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