Political Risk and Project NPV Drysdale Co.

(a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and political conditions. The spot rate of the Argentina peso in 1 year is expected to be $.40 based on these conditions.

However, it wants to also account for the 10 percent probability of a political crisis in Argentina, which would change the expected cash flows to 4 million Argentine pesos in 1 year. In addition, it wants to account for the 20 percent probability that the exchange rate may only be $.36 at the end of 1 year.

These two forms of country risk are independent.

Drysdale’s required rate of return is 25 percent and its initial outlay for this project is $1.4 million. Show the distribution of possible outcomes for the project’s net present value (NPV).