Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million.In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However, the government of the host country will block 20% of all cash flows.Thus, cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions, what is the project's NPV?
A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million

Question

Quizplus · Accepted Answer

First, calculate the net cash inflows after the 20% blockage: Years 1-2: $4 million * 80% = $3.2 million per year. Years 3-4: $6 million * 80% = $4.8 million per year. The expected terminal value is calculated as the average of the two possible outcomes, weighted by their probabilities: (0.5 * $2 million + 0.5 * $8 million) * 80% = $4 million. The adjusted cost of capital is 15% + 1% = 16%. Using these figures, the NPV can be calculated as follows: NPV = -$10 million + ($3.2 million / (1+0.16)^1) + ($3.2 million / (1+0.16)^2) + ($4.8 million / (1+0.16)^3) + ($4.8 million / (1+0.16)^4) + ($4 million / (1+0.16)^4) = $2.77 million.