MERU Plc is considering a capital budgeting project in Egypt. The project requires an initial outlay of
Question:
MERU Plc is considering a capital budgeting project in Egypt. The project requires an initial outlay of one (1) million Egyptian pounds; the Egyptian Pound is currently valued at £0.48 (GBP). In the first and second years of operation, the project will generate 700,000 Egyptian Pounds each year. After two years, MERU Plc will terminate the project, and the expected salvage value is 300,000 Egyptian pounds. MERU Plc has assigned a discount rate of 12% to this project. The following additional information is available
-There is currently no withholding tax on remittances to the United Kingdom, but there is a 20% chance that Egyptian government will impose a withholding tax of 10% beginning next year.
-There is a 50% chance that the Egyptian government will pay MERU Plc 100,000 Egyptian Pounds after two years instead of the 300,000 pounds it expects
-The value of the Egyptian pound is expected to remain unchanged over the next two years
Required:
a) Determine the net present value (NPV) of the project in each of the four possible scenarios
b) Determine the joint probability of each scenario
c) Compute the expected NPV of the project and make a recommendation to MERU Plc. regarding its feasibility
Expert Answer:
Tax rate T 10 n 2 r 12 PVAF n r PVAF 2 12 112 x 1 1 12 2 16901 PVIF n r PVIF 2 12 1 12 2 07972 Part ... View the full answer
