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?

Question

Quizplus · Accepted Answer

Time line: (In millions)
 11ea1b84_8bd3_d538_a54a_59af99540085_TB3581_00 
*Calculate the expected terminal value cash flow:
Expected terminal cash flow (CF?)= 0.5(8)+ 0.5(2)= 4 + 1 = 5.Calculate the unrestricted cash flows that can be repatriated to the parent firm:
Unrestricted cash flows = Projected cash inflows ×0.80.Tabular solution (In millions):
 11ea1b84_8bd3_d539_a54a_af4166876d38_TB3581_00 
 11ea1b84_8bd3_d53a_a54a_dbf032632ed3_TB3581_00 
Financial calculator solution (In millions):
Inputs: CF? = -10.0; CF? = 3.2; N? = 2; CF? = 4.8; N? = 2; CF? = 4.0; I/YR = 16.Output: NPV = $2.767 » $2.77 million.