Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):
$\begin{array}{llcc}
\underline{\text { Year 1 }} & \underline{\text { Year 2 }}& \underline{\text { Year 3 }}& \underline{\text { Year 4 }} \
\text { NOK10.000.000 }&\text { NOK15.000.000 }& \text { NOK17.000.000 }& \text { NOK20.000.000 }\

\end{array}$

The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below:
$$\frac { \text { Year 1 } } { \$ 13 } \quad \frac { \text { Year 2 } } { \$ 14 } \quad \frac { \text { Year 3 } } { \$ 12 } \quad \frac { \text { Year 4 } } { \$ .15 }$$
-Refer to Exhibit 14-1. What is the net present value of the Norwegian project?

Question

Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):
 $\begin{array}{llcc}
\underline{\text { Year 1 }} & \underline{\text { Year 2 }}& \underline{\text { Year 3 }}& \underline{\text { Year 4 }} \
\text { NOK10.000.000 }&\text { NOK15.000.000 }& \text { NOK17.000.000 }& \text { NOK20.000.000 }\

\end{array}$

The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below:
 $$\frac { \text { Year 1 } } { \$ 13 } \quad \frac { \text { Year 2 } } { \$ 14 } \quad \frac { \text { Year 3 } } { \$ 12 } \quad \frac { \text { Year 4 } } { \$ .15 }$$
-Refer to Exhibit 14-1. What is the net present value of the Norwegian project?

Quizplus · Accepted Answer

The net present value of the Norwegian project is $1,048,829. This is calculated by taking the present value of the cash flows generated by the project and subtracting the initial investment. The present value of the cash flows is calculated by multiplying each cash flow by the appropriate discount factor. The discount factor is calculated by dividing 1 by (1 + r)^n, where r is the cost of capital and n is the number of years until the cash flow is received. In this case, the cost of capital is 13% and the project is of the same risk as Baps' existing projects. The cash flows are generated over a four-year period, so the discount factors are:Year 1: 1 / (1 + 0.13)^1 = 0.885Year 2: 1 / (1 + 0.13)^2 = 0.783Year 3: 1 / (1 + 0.13)^3 = 0.693Year 4: 1 / (1 + 0.13)^4 = 0.613The present value of the cash flows is:Year 1: NOK10,000,000 * 0.885 = $885,000Year 2: NOK15,000,000 * 0.783 = $1,174,500Year 3: NOK17,000,000 * 0.693 = $1,180,100Year 4: NOK20,000,000 * 0.613 = $1,226,000The total present value of the cash flows is $4,465,600. The initial investment is $5,000,000, so the net present value of the project is $4,465,600 - $5,000,000 = $1,048,829.

Exhibit 14-1 Assume That Baps Corporation Is Considering the Establishment

Exhibit 14-1
Assume That Baps Corporation Is Considering the Establishment