International Business 9th Edition by Charles Hill

Exercise 27

You are the CFO of a Canadian firm that is considering building a $10 million factory in Russia to produce milk. The investment is expected to produce net cash flows of $3 million every year for the next 10 years, after which the investment will have to close down due to technological obsolescence. Scrap values will be zero. The cost of capital will be is 6% if financing is arranged through the Eurobond market. However, you have an option to finance the project by borrowing funds from a Russian bank at a 12 percent. Analysts tell you that due to high inflation in Russia, the Russian ruble is expected to depreciate against the Canadian dollar. Analysts also rate the probability of violent revolution occurring in Russia within the next ten years as high. How would you incorporate these factors into your evaluation of the investment opportunity? What would you recommend that the firm do?