Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required
Question:
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 |
| $.13 | $.14 | $.12 | $.15 |
a. What is 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. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is $____.
c. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%?
d. The Norwegian government is considering a change to their current laws on remitted funds requiring foreign subsidiary’s to keep their cashflows invested within Norway for at least 4 years. Baps is concerned that this may effect their investment decision. What would the net present value (NPV) of this project if Baps cannot remit funds till the end of the project.
Expert Answer:
The detailed answer for the above question is provided below a NPV of the Norwegian project First we ... View the full answer
