Question
Explain all the process to get to the answer: 3) A Firm in the United States is considering an investment in Bangladesh that yields the
Explain all the process to get to the answer:
3) A Firm in the United States is considering an investment in Bangladesh that yields the after tax taka (T) cash flows provided in the time line below. The appropriate discount for similar projects in the United States is 35.2%. The expected inflation in Bangladesh is 15% each year for the foreseeable future. The expected inflation in the United States is 4% each year for the foreseeable future. The appropriate discount rate for similar projects in Bangladesh is 49.5%. Assume the parity conditions hold. The current spot rate is 69.25T/$. What is the net present value of the project from the parent and project perspective? Should they accept the project? Show all the necessary calculations to compute the NPV from BOTH the parent and project perspective.
-2,000,000 T 850,000 T 950,000 T 700,000 T
0 1 2 3
S0 = 69.25T/$
S1=69.251.151.04=76.57451923 T/$
S2=69.251.1521.042=84.67374723T/$
S3=69.251.1531.043=93.62962434 T/$
Project
CF0 = -2,000,000
CF1 = 850,000
CF2 = 950,000
CF3 = 700,000
I= 49.5%
NPV = -T796,891.5673/69.25T/$= -$11,507.46
Parent
CF0 = -2,000,000/69.25 = -28,880.86643
CF1 = 850,000/76.57451923 = 11,100.29823
CF2 = 950,000/84.67374723 = 11,219.53417
CF3 = 700,000/93.62962434 = 7,476.266245
I= 35.2%
NPV = -$11,507.46
You rejected this project because result is negative.
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