QUESTION $2$

$[25$ Marks$]$

Travor Kotze is a French company that has been asked to provide consulting services to help the Gledis firm $($in Country Y$)$ improve its performance. Travor would need to spend $300,000$ euros today on expenses related to this project. In one year, Travor will receive payment from Gledis, which will be tied to Gledis's performance during the year. There is uncertainty about Gledis's performance and about Gledis's tendency for corruption.

Travor expects that it will receive $400,000Y$ if Gledis achieves strong performance following the consulting job. However, there are two forms of country risk that are a concern to Travor. There is an $80$ percent chance that Gledis will achieve a strong performance. There is a $20$ percent chance that Gledis will perform poorly, and in this case, Travor will receive a payment of only $200,000$Y$.$

While there is a $90$ percent chance that Gledis will not be corrupt and make its payment to Tovar, there is a $10$ percent chance that Gledis will become corrupt, and in this case, Gledis will not submit any payment to Travor.

$4$

Module code$/102/3/2025$

Assume that the outcome of Gedi's performance is independent of whether Gledis becomes corrupt. The prevailing spot rate of country $Y\text{'}$s currency is $0\mathrm{.}6$ euros to the $Y,$ but Travor expects that currency $Y$ will depreciate by $10$ percent in one year, regardless of Gledis's performance or whether it is corrupt.

Tovar's cost of capital is $26$ percent. Determine the expected value of the project's net present value. Determine the probability that the project's NPV will be negative.