A U.S.-based MNC is considering establishing a two-year project in New Zealand with

US$32 million initial investment.

The firm's cost of capital is 13%.

The required rate of return on this project is 15%.

The project is expected to generate cash flows of NZSI5 million in Year I and

N2$35 million in Year 2, and is expected to have a salvage value of

NZS30,000,000.

Assume no taxes, and a stable exchange rate of $0.60 and $0.63 per NZS in year 1

and 2 respectively.

All cash flows are remitted to the parent.

Required:

Calculate the USS cash flows remitted to the parent company each year over

the life of the project.

(5 marks)

il)

Calculate the present value of the USS cash flows to the parent.

fit Calculate the Net Present Value of the project.

(9 marks)

(4 marks)

iv Should the MNC accept the project? Justify your response.

(2 marks)

b)

Abkon Co. is a Swedish firm an borrows funds at an interest rate of 10% per year

Its beta is 1.0 and the long-term annualized risk-free rate in the Sweden is 6%.

The stock market retum in Sweden is expected to be 15% annually

Abkon Co. target capital structure is 45% debt and it is subject to a 30% corporate

tax rate. Estimate the company's cost of capital.