Assume that Wolverine expects to receive NZ$500,000 at the end of Year 1. The existing spot rate of the New Zealand dollar is $0.60, while the one-year forward rate is $0.62. Wolverine has created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate	Probability
$0.61	20%
$0.63	50%
$0.67	30%

Assume that one-year put options on New Zealand dollars are available with an exercise price of $0.63 and a premium of $0.04 per unit. One-year call options on New Zealand dollars are available with an exercise price of $0.60 per unit. Assume the following money market rates:

	United States	New Zealand
Deposit Rate	8%	5%
Borrowing Rate	9%	6%

Given the above information, determine whether a forward hedge, money market hedge, or currency options hedge would be most appropriate to mitigate currency risk. Then, compare your choice of hedging technique to an unhedged strategy and recommend whether Wolverine should hedge its receivables.

Assume that Wolverine expects to need NZ$1 million in one year to meet its short-term obligations (for example, accounts payable). Using any relevant information from Part 4, determine whether a forward hedge, money market hedge, or a currency options hedge would be the most appropriate tool. Then, compare your choice with an unhedged strategy and decide whether Wolverine should hedge its payables positions.

Assume that Wolverine uses the original financing proposal in Part 1 and that funds are blocked until the subsidiary is sold. The funds to be remitted are reinvested at a rate of 6%, after taxes, until the end of Year 3. How is the project NPV affected by this scenario?

What is the break-even salvage value of this project if Wolverine uses the original financing proposal and funds are not blocked? Discuss your answer.

Assume that Wolverine decides to implement the project using the original financing proposal. Also assume that after one year, a New Zealand firm offers Wolverine a price of $27 million after taxes for the subsidiary and Wolverine's original forecasts for Years 2 and 3 have not changed. Should Wolverine accept or reject the offer? Explain.

Based on the information gathered above, what are some unique challenges that MNCs encounter in their global investment and financing decisions? How should they effectively deal with these challenges in an era of increasing globalization of business activities?

		Capital Budgeting Analysis: Wolverine Corporation	Year 0	Year 1	Year 2	Year 3
	1	Demand		40,000	50,000	60,000
	2	Price per unit		NZ$500	NZ$511	NZ$530
	3	Total revenue = (1) (2)		NZ$20,000,000	NZ$25,550,000	NZ$31,800,000
	4	Variable cost per unit		NZ$30	NZ$35	NZ$40
	5	Total variable cost = (1) (4)		NZ$1,200,000	NZ$1,750,000	NZ$2,400,000
	6	Fixed cost		NZ$6,000,000	NZ$6,000,000	NZ$6,000,000
	7	Interest expense of New Zealand loan		NZ$2,800,000	NZ$2,800,000	NZ$2,800,000
	8	Noncash expense (depreciation)		NZ$5,000,000	NZ$5,000,000	NZ$5,000,000
	9	Total expenses = (5)+(6)+(7)+(8)		NZ$15,000,000	NZ$15,550,000	NZ$16,200,000
	10	Beforetax earnings of subsidiary = (3)(9)		NZ$5,000,000	NZ$10,000,000	NZ$15,600,000
	11	Host government tax (30%)		NZ$1,500,000	NZ$3,000,000	NZ$4,680,000
	12	Aftertax earnings of subsidiary		NZ$3,500,000	NZ$7,000,000	NZ$10,920,000
	13	Net cash flow to subsidiary = (12)+(8)		NZ$8,500,000	NZ$12,000,000	NZ$15,920,000
	14	NZ$ remitted by sub. (100% of CF)		NZ$8,500,000	NZ$12,000,000	NZ$15,920,000
	15	Withholding tax imposed on remitted funds (10%)		NZ$850,000	NZ$1,200,000	NZ$1,592,000
	16	NZ$ remitted after withholding taxes		NZ$7,650,000	NZ$10,800,000	NZ$14,328,000
	17	Salvage value				NZ$52,000,000
	18	Exchange rate of NZ$		0.52	0.54	0.56
	19	Cash flows to parent		$ 3,978,000.00	$ 6,415,200.00	$ 8,023,680.00
	20	PV of parent cash flows (20% of discount rate)		$ 3,978,000.00	$5,832,000	$37,143,680
	21	Initial investment by parent	($25,000)
	22	Cumulative NPV of cash flows		($12,685,000)	($17,635,000)	$3,860,185