Decisions Based on Capital Budgeting Marathon, Inc., considers a one-year project with the Belgian government. Its euro revenues would be guaranteed. Its consultant states that the percentage change in the euro is represented by a normal distribution and that, based on a 95 percent confidence interval, the percentage change in the euro is expected to be between 0 and 6 percent. Marathon uses this information to create three scenarios: 0,3, and 6 percent for the euro. It derives an estimated NPV based on each scenario and then determines the mean NPV. The NPV was positive for the 3 and 6 percent scenarios, but it was slightly negative for the 0 percent scenario. This led Marathon to reject the project. Its manager stated that it did not want to pursue a project that had a one-in-three chance of having a negative NPV. Do you agree with the manager’s interpretation of the analysis? Explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 14, Problem 22QA
Textbook Problem

Decisions Based on Capital Budgeting Marathon, Inc., considers a one-year project with the Belgian government. Its euro revenues would be guaranteed. Its consultant states that the percentage change in the euro is represented by a normal distribution and that, based on a 95 percent confidence interval, the percentage change in the euro is expected to be between 0 and 6 percent. Marathon uses this information to create three scenarios: 0,3, and 6 percent for the euro. It derives an estimated NPV based on each scenario and then determines the mean NPV. The NPV was positive for the 3 and 6 percent scenarios, but it was slightly negative for the 0 percent scenario. This led Marathon to reject the project. Its manager stated that it did not want to pursue a project that had a one-in-three chance of having a negative NPV. Do you agree with the manager’s interpretation of the analysis? Explain.

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