How Country Risk Affects NPV Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinars in each year. After two years, Monk will terminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of12 percent to this project. The following additional information is available: There is currently no withholding tax on remittances to the United States, but there is a 20 percent chance that the Tunisian government will impose a withholding tax of 10 percent beginning next year. There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after two years instead of the 300,000 dinars it expects. The value of the dinar is expected to remain unchanged over the next two years. a. Determine the net present value of the project in each of the four possible scenarios. b. Determine the joint probability of each scenario. c. Compute the expected NPV of the project and make a recommendation to Monk regarding its feasibility. Step 1 So lets list the 4 scenarios: 1. No Remittance Tax and Salvage value = 300,000 2. No Remittance Tax and Salvage value = 100,000 3. Remittance Tax and Salvage value = 300,000 4. Remittance Tax and Salvage value = 100,000 A. No Remittance Tax and Salvage value = 300,000 Year 0 1 2 Income 700,000.00 700,000.00 Salvage Value 300,000.00 Investment -1,000,000.00 Cash Flow (Dinar) -1,000,000.00 700,000.00 1,000,000.00 Remittance Tax 0 0 Cash Flow (Dinar) To exchange -1,000,000.00 700,000.00 1,000,000.00 Cash Flow (Dollar) -700,000.00 490,000.00 700,000.00 Present Value of Cash flows -700,000.00 437,500.00 558,035.71 NPV 295,535.71 Step 2 B. No Remittance Tax and Salvage value = 100,000 Year 0 1 2 Income 700,000.00 700,000.00 Salvage Value 100,000.00 Investment -1,000,000.00 Cash Flow (Dinar) -1,000,000.00 700,000.00 800,000.00. (This part of the question that need to be answered) How Country Risk Affects NPV In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent. Reevaluate the NPV of the project’s expected scenario using this adjusted discount rate.
How Country Risk Affects NPV Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinars in each year. After two years, Monk will terminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of12 percent to this project. The following additional information is available: There is currently no withholding tax on remittances to the United States, but there is a 20 percent chance that the Tunisian government will impose a withholding tax of 10 percent beginning next year. There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after two years instead of the 300,000 dinars it expects. The value of the dinar is expected to remain unchanged over the next two years. a. Determine the
Step 1
So lets list the 4 scenarios:
1. No Remittance Tax and Salvage value = 300,000
2. No Remittance Tax and Salvage value = 100,000
3. Remittance Tax and Salvage value = 300,000
4. Remittance Tax and Salvage value = 100,000
A. No Remittance Tax and Salvage value = 300,000
Year 0 1 2
Income 700,000.00 700,000.00
Salvage Value 300,000.00
Investment -1,000,000.00
Cash Flow (Dinar) -1,000,000.00 700,000.00 1,000,000.00
Remittance Tax 0 0
Cash Flow (Dinar) To exchange -1,000,000.00 700,000.00 1,000,000.00
Cash Flow (Dollar) -700,000.00 490,000.00 700,000.00
Present Value of Cash flows -700,000.00 437,500.00 558,035.71
NPV 295,535.71
Step 2
B. No Remittance Tax and Salvage value = 100,000
Year 0 1 2
Income 700,000.00 700,000.00
Salvage Value 100,000.00
Investment -1,000,000.00
Cash Flow (Dinar) -1,000,000.00 700,000.00 800,000.00.
(This part of the question that need to be answered)
How Country Risk Affects NPV In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent. Reevaluate the NPV of the project’s expected scenario using this adjusted discount rate.
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