You are a dog toy producer that wants to establish a subsidiary in the small European...

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You are a dog toy producer that wants to establish a subsidiary in the small European country of Belgium. However, you have heard that the new prime minister is a cat lover and may shut down (part of) your operations. Therefore, you expect to be present in Belgium two years at most, after which you will move your subsidiary elsewhere. The expected cash flows for the first year are EUR18.9 million if your Belgian subsidiary survives and EUR4.4 million if the local government intervenes. They are EUR13.6 million if the subsidiary survives in year 2 and EUR2.9 million if the government intervenes. The subsidiary shuts down after year 2; there are no further cash flows. You think there is a 49% chance of government intervention in year 1 and a 63.1% chance of government intervention in year 2. The discount rate is 6% p.a. What is the project's NPV? You are a dog toy producer that wants to establish a subsidiary in the small European country of Belgium. However, you have heard that the new prime minister is a cat lover and may shut down (part of) your operations. Therefore, you expect to be present in Belgium two years at most, after which you will move your subsidiary elsewhere. The expected cash flows for the first year are EUR18.9 million if your Belgian subsidiary survives and EUR4.4 million if the local government intervenes. They are EUR13.6 million if the subsidiary survives in year 2 and EUR2.9 million if the government intervenes. The subsidiary shuts down after year 2; there are no further cash flows. You think there is a 49% chance of government intervention in year 1 and a 63.1% chance of government intervention in year 2. The discount rate is 6% p.a. What is the project's NPV?

Answer rating: 100% (QA)

To calculate the net present value NPV of the project we need to discount the expected cash flows to ... View the full answer