Question
Suppose a project by a US firm in in Brazil is expected to generate a $7million annuity over 5 years from an initial investment of
Suppose a project by a US firm in in Brazil is expected to generate a $7million annuity over 5 years from an initial investment of $20 million. If the required return on this investment is 10%, how large does the probability of expropriation in year 4 have to be before the investment has a negative NPV? Assume that all cash inflows occur at the end of each year and that the expropriation, if it occurs, will occur prior to the year 4 cash flow or not at all. In the event of expropriation,neither the year 4 cash flow nor the year 5 cash flow will occur.
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