Question: Suppose a firm projects a 5 million perpetuity from an
Suppose a firm projects a $5 million perpetuity from an investment of $20 million in Spain. If the required return on this investment is 20%, how large does the probability of expropriation in year 4 have to be before the investment has a negative NPV? Assume that all cash inflows occur at the end of each year and that the expropriation, if it occurs, will occur just before the year 4 cash inflow or not at all. There is no compensation in the event of expropriation.
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