Heading 234 56 www.vi r y. . .. w ww.d 15. FDI Valuation XH plc is considering the following cash flows for project Y (mining rare earth) in country k that requires an initial Investment of 2.5m 000 Year 1 800 Year 2 1200 Year 3 1000 Year 4 1000 a) Calculate the NPV using the companies weighted average cost of capital of 12 per cent - is the project worth undertaking? b) A director points out that as the investment is in a country that is relatively unstable, a more appropriate discount rate would be 25 per cent. Recalculate the NPV at 25 per cent and reconsider your answer to part (a). c) A second director argues that the risk is in fact about whether or not a licence will be granted to mine rare earth. If it is not granted then XH ple can withdraw immediately with a loss of about 300 000. Reconsider your answer to the first two parts of this question d) A third director points out that should XH not go ahead, a local mining company CC will almost certainly put in for a licence and is likely to collaborate with a rival US company. Other depsoits are thought to be present. Reconsider your previous answers. e) Identify the real option and game theoretic (competitive) elements of this question Advanced Questions