Syntax Tar Sand Inc., a Canadian company, has an opportunity to invest in Peru.The project requires an immediate cash outlay of $3 million and is expected to provide after-tax cash flows of $800,000 in year 1, $1,000,000 in year 2, $1,200,000 in year 3, and $1,600,000 in year 4.The appropriate discount rate for a similar project in Canada is 12%.The risks of implementing such a project in Peru will require a risk premium of 4%.What will be the impact on the shareholder value of Syntax if the firm undertakes this project in Peru?

Question

Quizplus · Accepted Answer

To determine the impact on shareholder value, we calculate the Net Present Value (NPV) of the project using the adjusted discount rate (12% + 4% = 16%) for the additional risk of investing in Peru. The NPV formula is NPV = Σ [Ct / (1 + r)^t] - C0, where Ct is the cash flow at time t, r is the discount rate, and C0 is the initial investment. Calculating the NPV for the given cash flows and discount rate gives an NPV of $85,273, indicating an increase in shareholder value by this amount if the project is undertaken.