Question #2:

Domestic versus MNC Valuation

a. IBM wants to undertake a 5yrs project in the USA that has the projected free cash flow stream shown below. What is the net present value (NPV) of the project if the WACC is 10%? Assume the initial investment is $6,500

Years : 2019 2020 2021 2022 2023

Free Cash Flows : $1,000 $2,000 $3,000 $4,000 $5,000

What NPV & IRR?

b. Assume the project will be undertaken by IBMs subsidiary in Canada with the same forecasted free cash flow stream. What is the NPV of the project given the projected exchange rates of C$/US$? Assume the initial investment in 2018 is $6,500 and the initial exchange rate is C$1.28/US$

Years : 2019 2020 2021 2022 2023

Free Cash Flows : C$1,000 C$2,000 C$3,000 C$4,000 C$5,000

Exchange rates : .9 .55 .45 .6 .5

What NPV & IRR?