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1 1 . A U . S . multinational corporation is considering a new project in the UK . The project requires an initial investment

11. A U.S. multinational corporation is considering a new project in the UK. The
project requires an initial investment or outlay of 1,005 million. The project
is expected to have cash inflow of 805 million in the first year of operation
and 816 million in the second year of operation. The current exchange rate is
$1.2632/. The risk-free interest rate in the United States is 5 percent and the risk- free interest rate in the UK is 6 percent. The president of the firm
estimates that the required rate of return on the market portfolio in the United
States is 12.36 percent, and that the required rate of return on the market
portfolio in the UK is 14.18 percent. The president also estimates that the
project beta is about 0.80, valued against either the U.S. or the UK market.
What is the present value of the project if evaluated using the decentralized
method of international capital budgeting?
1016.78/1+0.10888=916.891031.57/(1+0.10888)^2=838.70
916.89+838.70=$1755.59million
12. Consider the information provided in #11 above. What is the present value of
the project if evaluated using the centralized method of international capital
budgeting?

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