Assume that Tasmir Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent company is USD5,000,000. If the project were undertaken, Tasmir would terminate the project after four years. Tasmir's cost of capital is 12%, and the project is of the same risk as Tasmir'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 2 NOK15,000,000 Year 3 NOK17,000,000 Year 4 NOK20,000,000 The current exchange rate of the Norwegian kroner is USDO.135. Tasmir's exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 Year 2 Year 3 Year 4 USDO.13 USDO.14 USDO.12 USDO.15 (a) Calculate the net present value of the Norwegian project. (b) Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value. Tasmir is not completely certain that the amount of the salvage. Compute the salvage value of the project. (c) Tasmir is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. Calculate the net present value (NPV) of this project if a 16% cost of capital is used instead of 12%.
Assume that Tasmir Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent company is USD5,000,000. If the project were undertaken, Tasmir would terminate the project after four years. Tasmir's cost of capital is 12%, and the project is of the same risk as Tasmir'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 2 NOK15,000,000 Year 3 NOK17,000,000 Year 4 NOK20,000,000 The current exchange rate of the Norwegian kroner is USDO.135. Tasmir's exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 Year 2 Year 3 Year 4 USDO.13 USDO.14 USDO.12 USDO.15 (a) Calculate the net present value of the Norwegian project. (b) Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value. Tasmir is not completely certain that the amount of the salvage. Compute the salvage value of the project. (c) Tasmir is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. Calculate the net present value (NPV) of this project if a 16% cost of capital is used instead of 12%.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 22P
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Assume that Tasmir Corporation is considering the establishment of a subsidiary in Norway. The
initial investment required by the parent company is USD5,000,000. If the project were undertaken,
Tasmir would terminate the project after four years. Tasmir's cost of capital is 12%, and the project is
of the same risk as Tasmir'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 2
NOK15,000,000
Year 3
NOK17,000,000
Year 4
NOK20,000,000
The current exchange rate of the Norwegian kroner is USDO.135. Tasmir's exchange rate forecast for
the Norwegian kroner over the project's lifetime is listed below:
Year 1
Year 2
Year 3
Year 4
USDO.13
USDO.14
USDO.12
USDO.15
(a) Calculate the net present value of the Norwegian project.
(b) Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value.
Tasmir is not completely certain that the amount of the salvage. Compute the salvage
value of the project.
(c) Tasmir is also uncertain regarding the cost of capital. Recently, Norway has been
involved in some political turmoil. Calculate the net present value (NPV) of this
project if a 16% cost of capital is used instead of 12%.
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