1. Assume that Wolverine decides to implement the project using the original financing proposal. Also assume that after one year, a New Zealand firm offers Wolverine a price of $27 million after taxes for the subsidiary and Wolverine's original forecasts for Years 2 and 3 have not changed. Should Wolverine accept or reject the offer? Explain.

1. The net present value of this project is $3,860,185. Therefore, Wolverine should accept this project. 2. This alternative financing arrangement will have the following effects. First, it will increase the dollar amount of the initial outlay to $35 million. Second, it avoids the annual interest expense of NZ$2,800,000. Third, it will increase the salvage value from NZ$52,000,000 to NZ$70,000,000. The capital budgeting analysis is revised to incorporate these changes. The analysis shows that this alternative financing arrangement is expected to generate a lower net present value than the original financing arrangement. 3. The NPV would be more sensitive to exchange rate movements if the parent uses its own financing to cover the working capital requirements. If it used New Zealand financing, a portion of NZ$ cash flows could be used to cover the interest payments on debt. Thus, there would be less NZ$ to be converted to dollars and less exposure to exchange rate movements