Assume you are working for a firm based in the United States that is considering a new
Question:
Assume you are working for a firm based in the United States that is considering a new project in the country of Tambivia. This new project will produce the following cash flows measured in TABs (the currency of Tambivia), which are expected to be repatriated to the parent company in the United States.
Year Cash Flow (in millions of TABs)
0 ………………………………………. −12
1 ………………………………………. 5
2 ………………………………………. 6
3 ………………………………………. 7
4 ………………………………………. 7
In addition, assume the risk-free rate in the United States is 5 percent, and that this project is riskier than most and, as such, the firm has determined that it should require a 12 percent premium over the risk-free rate. Thus, the appropriate discount rate for this project is 17 percent. In addition, the current spot exchange rate is .60TAB/$, and the one-year forward exchange rate is .57TAB/$. What is the project’s NPV?
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