1. Given the cash flow schedules of the oil project and four foreign aid projects (Projects A through D), compute the internal rate of return (IRR) and net present value (NPV) of each project (using both 16% and 26% as project's cost of capital). Based on these two criteria, which project(s) should Nysa undertake?

2. Calculate the IRRs and NPVs that Nysa would realize if it accepts each of the four foreign aid projects of Projects A through D, in combination with the oil drilling project. Which combination of projects appears to be the better investment alternative?

3. Knudsen believes that the values given in Table 2 are valid for those types of companies in the United States, but he does not feel that they are a suitable basis for an accept/reject decision for a Cayennian project. Rather, he feels that he should employ the capital asset pricing model (CAPM) to account for the amount of risk that is inherent in each project. After careful consideration, he has derived the following values for use in the CAPM:

Given this information, calculate the risk-adjusted discount rates (RADRs) for all projects using the CAPM and then evaluate each project by the IRR and NPV rules using its computed RADR. What foreign aid project does your analysis recommend to accept?

4. Dan Franklin, president of Magnotech, Inc. and a director of Nysa, has called Knudsen's attention to the hurdle rate of 16 percent (Nysa's cost of capital currently used for all projects). Since the IRRs of all five projects exceed 16 percent, he asks why, especially in view of Nysa's ample cash flows and funds for investment, all of the projects should not be accepted? Knudsen, like Matlock, disagrees with this thinking, contending that none of the "foreign aid" projects gives Nysa an adequate return for the amount of risk the company would be taking. Knudsen plans to support his position by referring to Fig. 1, which shows that, while all four projects' returns lie above the line representing Nysa's weighted average cost of capital (ka), they are below the security market line (SML), which represents the minimum amount of return that a firm should require for a specified amount of risk. Of course, the oil project cannot be accepted unless at least one of the "foreign aid" projects is accepted in conjunction with it.

Therefore, you should calculate for Knudsen the weighted average beta coefficients for Projects A through D, in conjunction with the oil drilling project and compute the RADR for each of the combined projects (Oil +A, Oil + B, etc.). Which project combination is the most advantageous? Does your analysis recommend the same foreign aid project as in Question #3? (Hint: plot these values, and those found in Question 3, on Figure 1 to better illustrate the relative positions of the investment proposals.)

5. Often, due to its ample cash flows, Nysa projects an excessive amount of cash on hand over and above the amount required for daily operations. Knudsen invests the excess in earning assets rather than holding it as cash. Project X in Figure 1 represents a potential investment (not previously discussed in this case) that Knudsen has investigated thoroughly. Wellesley-Haverford Ltd., a foreign company with a tight cash position due to its recent expansion program, requires a loan of $50 million. Wellesley-Haverford contacted Knudsen in hopes of borrowing the funds from Nysa.

After determining that his company has sufficient funds to meet the loan request, Knudsen calculated that the investment would have a beta coefficient of 0.4, while the interest rate would be 15 percent.

He felt that the beta of 0.4 was appropriate for several reasons:

(a) Knudsen has had a long history of successful dealings with Wellesley-Haverford;

(b) Wellesley-Haverford is a very stable, profitable firm;

(c) the loan can he called for repayment any time rates indicate a deteriorating situation and

(d) the loan will he secured by sonic liquid, safe assets owned by Wellesley-Haverford. In combination, these factors make the loan a very low-risk investment

The problem that faces Knudsen is that, although the Wellesley-Haverford proposal has a very small amount of risk and a return in excess of that required by the SML., the percentage return lies below the average cost of capital (or hurdle rate) of 16 percent that Nysa presently employs. He sees this as an excellent opportunity to illustrate the desirability of using risk-adjusted discount rates rather than a constant rate for project selection.

Do you think Nysa should extend the loan to Wellesley-Haverford Ltd.? Justify your decision both conceptually and quantitatively and discuss your analysis from the viewpoint of the directors and of Knudsen.

6. Calculate NPVs of Oil Drilling Project and each of Projects A through D individually using each project's RADR you computed earlier and then compute NPVs of each of the combined foreign aid projects with the Oil Project. your NPV analyses recommend the same project decisions as the IRR analyses performed earlier? Based on these calculations, should Nysa accept any of the projects?

7. Defend or criticize Robert Tyson's suggestion to accept Project B or C as Nysa's "foreign aid" project.

8. What additional information would be useful to the directors in making this type of multinational capital budgeting decision? Discuss the feasibility of obtaining such information and describe specific applications if it could be obtained.

9. Based on your answers to the previous questions, which project(s), if any, should Nysa accept? Remember that at least one "foreign aid" project must be accepted in order to receive the oil concession from Cayenne.