Assume that management is considering whether to make the foreign direct investment described in Exercise 3. Investment

Question:

Assume that management is considering whether to make the foreign direct investment described in Exercise 3. Investment will require $6,000,000 in equity capital. Cash flows to the parent are expected to increase by 5 percent over the previous year for each year after year 2 (through year 6). forecasts are as follows:
Year Rate
1 RUB .......... 26 = $1
2 RUB .......... 27 = $1
3 RUB .......... 29 = $1
4–6 RUB ......... 31 = $1
Management insists on a risk premium of 10 percent when evaluating foreign projects.

Required:
Assuming a weighted average of 10 percent and no expected changes in differential tax rates, evaluate the desirability of the Russian investment using a traditional analysis.

Discounted Cash Flows
What is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...