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):
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:

-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):
  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:
 
-Refer to Exhibit 14-1. What is the net present value of the Norwegian project?

Quizplus · Accepted Answer

To calculate the net present value, we need to convert the cash flows from Norwegian kroner to dollars using the forecasted exchange rate. Then, we can use the present value formula to calculate the net present value.

Using the forecasted exchange rate, we can convert the cash flows to dollars:
Year 1: 5,000,000 NOK * $0.145 = $725,000
Year 2: 6,000,000 NOK * $0.157 = $942,000
Year 3: 7,000,000 NOK * $0.152 = $1,064,000
Year 4: 8,000,000 NOK * $0.147 = $1,176,000

Then, we can calculate the present value of each cash flow using the formula: PV = FV / (1 + r)n, where r is the cost of capital, and n is the year.
PV1 = $725,000 / (1 + 0.13)1 = $642,523
PV2 = $942,000 / (1 + 0.13)2 = $738,006
PV3 = $1,064,000 / (1 + 0.13)3 = $767,625
PV4 = $1,176,000 / (1 + 0.13)4 = $792,272

Finally, we can calculate the net present value by subtracting the initial investment from the sum of the present values:
NPV = -$5,000,000 + $642,523 + $738,006 + $767,625 + $792,272 = $1,048,829

Therefore, the net present value of the Norwegian project is $1,048,829, and the best choice is C.

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