Chapter 14, Problem 28QA

How Country Risk Affects NPVMonk, Inc., isconsidering a capital budgeting project in Tunisia. Theproject requires an initial outlay of 1 million Tunisiandinars; the dinar is currently valued at $.70. In the firstand second years of operation, the project will generate 700,000 dinars in each year. After two years, Monk willterminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of12 percent to this project. The following additionalinformation is available: There is currently no withholding tax on remit-tances to the United States, but there is a 20 percentchance that the Tunisian government will impose awithholding tax of 10 percent beginning next year. There is a 50 percent chance that the Tunisian gov-ernment will pay Monk 100,000 dinar after twoyears instead of the 300,000 dinars it expects. The value of the dinar is expected to remainunchanged over the next two years. a.Determine the net present value of the project ineach of the…

FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinationalmanufacturing company. Currently, Sandrine’s financial planners are consideringundertaking a 1-year project in the United States. The project’s expected dollardenominated cash flows consist of an initial investment of $2,000 and a cash inflow thefollowing year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%.Currently, 1 U.S. dollar will buy 0.94 Swiss franc. In addition, 1-year risk-freesecurities in the United States are yielding 3%, while similar securities in Switzerlandare yielding 1.50%.a. If this project was instead undertaken by a similar U.S.-based company with the samerisk-adjusted cost of capital, what would be the net present value and rate of returngenerated by this project?b. What is the expected forward exchange rate 1 year from now?c. If Sandrine undertakes the project, what is the net present value and rate of return of theproject for Sandrine?

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…