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A consumer product firm is considering making a major investment in China. The investment is expected to cost $5 billion, and the
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- You are International Business Manager at a UK based company. Considering high demand your company plans a full-scale expansion. Your company has identified USA and Europe as potential markets. You are requested to analyse both projects and advise. In considering such large project, you must work out the risk of each project, cost of capital and NPV. Allocate discount rate for each project accordingly and justify why you allocated this rate in your discussion. Discuss how international risks can be managed. Projected cash flows in respective currencies: Year Net Cash Flow – USD USA Net Cash Flow - EUR Europe0 -20 million -20 million 1 2 million 2 million2 4 million 3 million3 5 million 4 million4 6 million 8 million5 8 million 8 million Instructions:a. Discuss viability of both projects in today’s global business context and allocate discount rate. b. How much investment is needed for each project and what is the NPV of each project? c.…Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and political conditions. The spot rate of the Argentina peso in 1 year is expected to be $.40 based on these conditions. However, it wants to also account for the 10 percent probability of a political crisis in Argentina, which would change the expected cash flows to 4 million Argentine pesos in 1 year. In addition, it wants to account for the 20 percent probability that the exchange rate may only be $.36 at the end of 1 year. These two forms of country risk are independent. Drysdale’s required rate of return is 25 percent and its initial outlay for this project is $1.4 million. Show the distribution of possible outcomes for the project’s net present value (NPV).swered Answer Jensen Aquatics Inc., which manufactures and sells scuba gear worldwide, is considering an investment in either Europe or Great Britain. Consider the following cash flows for each project, assume a 12% wacc, and consider these to be average risk projects for the firm. Answer the questions that follow. Britain Total cash inflows (E) Total cash outflows (6) Additional dollar cash inflows (5) Forecast exchange rate (S/E) Europe Total cash inflows (€) Total cash outflows (0) Additional dollar cash inflows (5) Forecast exchange rate (S/E) euro 4,945 $4,945 $6,420 Year 0 (Today) euro 6,420 0 15,000 0 1.50 0 20,000 0 1.00 Refer to Table 16.1. The NPV for the European investment is estimated at Year 1 8000 1000 500 1.46 12,000 1500 500 0.96 Year 2 8000 1000 500 1.45 12.000 1500 500 0.94 Year 3 8000 1000 500 1.44 12.000 1500 500 0.92
- Investment advisors recommend risk reduction through international diversification. International investing allows you to take advantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment in either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, which has a 21% chance for being good, a 52% chance for being fair, and a 27% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table. Return Rates in Europe: Good, 10%; Fair, 4%; Poor, -3% Return Rates in Asia: Good, 24%; Fair, 4%; Poor, -18% a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4 decimal places and final answers to 2 decimal places.)If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. Group of answer choices True FalseApple is considering a large capital investment in Brazil. The project cash flows have been prepared in Reals, however, Apple plans to fund the entire investment out of its US Dollar ($) holdings. Describe the qualitative and quantitative capital budgeting procedures that Apple should use to evaluate the investment.
- (a) Suppose that the economy of Microland is expanding rabidly. Due to this rapid expansion, the Federal Reserve Bank is pursuing a contractionary monetary policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. (b) Suppose that the economy of Macroland is expanding rabidly. Due to this rapid expansion, the Federal Government is pursuing a contractionary fiscal policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. Is there any crowding-out due to the contractionary fiscal policy?The US based company is investing in a 2-year project in Europe. The initial investment is €10,000. The expected cash inflow in the year one is €6,000 and in the year two is €8,000. The risk-free rate in US is 3% and Europe 2%. If the spot rate is $1.25/€ and the required rate of return of the project is 14%, calculate the NPV of the project in dollars. (A) The NPV of the project in dollars is $1,773.62. (B) The NPV of the project in dollars is $1,704.32. (C) The NPV of the project in dollars is $1,418.90. (D) The NPV of the project in dollars is $1,989.74.Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $1001, and the exchange rate will be $1.28/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $792, and the exchange rate will be $1.45/£. You assess that the American economy will experience a boom with a 70 percent probability and a recession with the remaining probability.Estimate the Covariance between P and S
- Suppose IBM signed a contract to buy a supply of computer chips from a German firm. Theprice is 10 million euros, and the chips will bedelivered immediately, but IBM can delay payment for six months if it wants to. What riskwould IBM be exposed to if it delays payment?Can it hedge this risk? Should it pay now ordelay payment?Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $946, and the exchange rate will be $1.34/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $768, and the exchange rate will be $1.39/£. You assess that the American economy will experience a boom with a 80 percent probability and a recession with the remaining probability. Estimate the expected value of the spot rate (in £ X.XXXX)Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $1,001,980, and the exchange rate will be $1.4/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $502, 240, and the exchange rate will be $1.6/£. You assess that the American economy will experience a boom with a 50 percent probability and a recession with a 50 percent probability. a. Estimate your exposure to the exchange risk. (Round final answer to nearest dollar.) b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. (Round final answer to nearest dollar.)
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