Question 5: 20 marks (a) Sandoval Enterprises, a U.S., based company is considering a three-year project...

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Question 5: 20 marks (a) Sandoval Enterprises, a U.S., based company is considering a three-year project in a European country. The company requires an initial investment of 900 million and expect to receive 150 million in year 1, 500 million in year 2 and 400 million in year 3. The current inflation rates in U.S. and in Europe are 4% and 2% respectively. These inflation rates are expected to remain constant over this three-year period. The cost of capital in U.S. is 15% per annum and the current spot exchange rate between dollar and euro is $1.31/E. Using two alternative approaches find out whether this is a good investment from the perspective of the shareholders of Sandoval Enterprises. Briefly explain why the results of these alternative approaches should be similar. (12 marks) (b) Discuss how sensitivity analysis can be conducted by Sandoval Enterprises before accepting or rejecting the above project using the NPV obtained in (a). (8 marks) Question 5: 20 marks (a) Sandoval Enterprises, a U.S., based company is considering a three-year project in a European country. The company requires an initial investment of 900 million and expect to receive 150 million in year 1, 500 million in year 2 and 400 million in year 3. The current inflation rates in U.S. and in Europe are 4% and 2% respectively. These inflation rates are expected to remain constant over this three-year period. The cost of capital in U.S. is 15% per annum and the current spot exchange rate between dollar and euro is $1.31/E. Using two alternative approaches find out whether this is a good investment from the perspective of the shareholders of Sandoval Enterprises. Briefly explain why the results of these alternative approaches should be similar. (12 marks) (b) Discuss how sensitivity analysis can be conducted by Sandoval Enterprises before accepting or rejecting the above project using the NPV obtained in (a). (8 marks)

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Answer a To determine whether the project is a good investment from the perspective of the shareholders of Sandoval Enterprises we can calculate the N... View the full answer