Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment...

  

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Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6 million. If the project is undertaken the project will last 4 years. Baps' cost of capital is 10%, 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 NOK 10 million Year 2 NOK 15 million Year 1 $0.12 Year 3 NOK 17 million The current exchange rate of the Norwegian kroner is $0.135. Baps' exchange rate forecast for the Norwegian kroner is listed below: Year 2 $0.15 Year 4 NOK 30 million Year 3 Year 4 $0.15 $0.14 a. What is the net present value (NPV) of the Norwegian project? What's the investment decision? (8) b. If the cost of capital were 15% compute the revised NPV. Does your decision change now? (7) Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6 million. If the project is undertaken the project will last 4 years. Baps' cost of capital is 10%, 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 NOK 10 million Year 2 NOK 15 million Year 1 $0.12 Year 3 NOK 17 million The current exchange rate of the Norwegian kroner is $0.135. Baps' exchange rate forecast for the Norwegian kroner is listed below: Year 2 $0.15 Year 4 NOK 30 million Year 3 Year 4 $0.15 $0.14 a. What is the net present value (NPV) of the Norwegian project? What's the investment decision? (8) b. If the cost of capital were 15% compute the revised NPV. Does your decision change now? (7)

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a Net Present Value NPV of the Norwegian Project at 10 Cost of Capital First we need to convert the ... View the full answer