Question
Bailey Communication, an American multinational is evaluating a proposed acquisition of a new satellite system in Italy that will boost its transmission area in Europe.
Bailey Communication, an American multinational is evaluating a proposed acquisition of a new satellite system in Italy that will boost its transmission area in Europe. The satellite system is expected to cost 25 million. The project life is for the next 4 years in which the new satellite system is expected to provide cashflows of 17.25 million per year. The spot exchange rate is 0.95 per U.S. dollar across the life of the project. The projects cost of capital which includes a foreign exchange risk premium is 10 percent. a) Calculate the projects U.S. dollar denominated net present value (NPV)? b) If U.S dollar is expected to strengthen annually by 0.2 percent. Calculate the revised NPV if the cost is revised to 11%? c) Based on part (a), all else remains. Bailey Communication is considering revising its current cost of capital to include the increase in risk premium due to political uncertainty in Italy. The revised cost of capital now becomes 18 percent. Calculate Baileys new NPV with the new cost of capital. d) Comparing the NPV calculations from part (a) to (c), why do you think that the multinational companys average cost of capital higher or lower than their domestic counterparts?
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