23. Your company wants to open a shipping facility that would produce perpetual revenues of $4M per year if exchange rates rise or $6M per year if exchange rates fall. The perpetual operating costs will be $2M per year and grow by 3 percent per year. The likelihood of exchange rates rising is 30 percent. The project has an upfront cost of $12M. Assume that the cost of capital is 8 percent and that the same discount rate can be applied to the operating costs. 

1. What is the NPV of the project? Is this a worthwhile investment? 

2. Suppose that the currency of the country in which the firm is headquartered trades at a forward premium, would this be good or bad news to the firm? 

3. Suppose that we learn with certainty that exchange rates will rise. What is the NPV of this investment? 

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project and determine its worthiness as an investment well discount the cash flows using the cost of cap... View the full answer