Question:

5. Accounting for risk in capital budgeting Suppose that Sherman-Co., a U.S.-based MNC is considering a plan to establish a subsidiary in Singapore. The MNC would establish the subsidiary using an upfront investment of $10,000,000 and would sell the suisidiary after four years; While it is confident in the values of certain paramaters af the cepital budgeting analysis, there is some substantial risk in the tax rate on earnings remitted from singapore as well as the salvage vaiue. In particular, Sherman believes that there are two possible tax rates with the following probabilities. Additionally, Sherman believes that there are two possible salvage values with the following probablities. Additionally, Sherman believes that there are two possible salvage values with the following probabilities., (i) Since there are two possible values for the tax rate, and two possible values for the salvage value, there are four total scenarios as cutined in the following table. Given these scenarios, Sherman seeks to estimate the expected net present value of the project in the face of this uncertainty. Suppose that the required rate of return is 15.009 for all scenarios. The following table adds the present value of after-tax U.S. dollar cash fiaws ti the parent and the initial investment in rows. (20) and (21) (respectively) to the capital budgeting analysis. Complete row (22) of the table, filing in the cumviative net present value of the project in each year. Hint: Use a minus sign to indicate a negative number. Complete row (22) of the table, filling in the cumulative net present value of the project in each year. Note: The values in row (20) are rounded to the nearest dollar. Use these rounded values when calculating the cumulative net present v Hint: Use a minus sign to indicate a negative number. ent value