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Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6,000,000. If the project
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 12%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Problems: 1. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 1270, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 $.13 Year 2 $.14 Year 3 $.12 Year 4 $.15 Year 1 Year 2 Year 3 Year 4 (a) Complete the following table Year 0 Cash flow to parent (US$) PV of parent cash flow (US$) (b) What is the NPV of the project
Assume that Baps Corporation is considering the establishment of a subsidiary in
Norway. The initial investment required by the parent is $6,000,000. If the project is
undertaken, Baps would terminate the project after four years. Baps' cost of capital is 12%,
and the project is of the same risk as Baps' existing projects. All cash flows generated
from the project will be remitted to the parent at the end of each year. Listed below are the
estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in
Norwegian kroner (NOK):
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