A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to:
A) lower its estimate of the previously computed NPV.
B) increase its estimate of the previously computed NPV.
C) lower its estimate of the previously computed NPV, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV.
D) increase its estimate of the previously computed NPV, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount.
E) None of these are correct.

Question

Quizplus · Accepted Answer

A substantial depreciation in the Algerian dinar would decrease the value of the subsidiary's cash flows in U.S. dollar terms. This would result in a lower estimated NPV, as the NPV calculation uses discounted cash flows in U.S. dollars.

A US-Based MNC Has Just Established a Subsidiary in Algeria