1. Severe political-risk or expropriation of assets:

Suppose your multinational corporation has made an initial investment of $20 million in a foreign project with a WACC of 15% and that generates a cashflow of $5 million per year for next ten years. If there is a probability of 50% that the foreign government may expropriate your project assets in the third year of the project how will you take this into account in calculating the NPV of the foreign project? Give a brief answer using a time-line and a binomial model for severe political risk (show your calculations).