North Pole Inc.,a Canadian company,has an opportunity to invest in India.The project requires an immediate cash outlay of $2 million and is expected to provide after-tax cash flows of $600,000 in year 1,$800,000 in year 2,$1,000,000 in year 3,and $1,200,000 in year 4.The beta for a similar project in Canada is 1.2.The risk-free rate is 5 percent and the market risk premium is 7.5 percent.The risks of implementing such a project in India will require a risk premium of 4.5 percent.What will be the impact on the shareholder value of North Pole Inc.if the firm undertakes this project?

Question

Quizplus · Accepted Answer

Project's required return = 5% + 1.2*7.5% + 4.5% = 18.5%
Shareholder value of North Pole increases by the value of the positive NPV 11ea8229_3484_ce0d_bbd8_cf14a34c318a_TB1726_00