The South Korean multinational manufacturing firm, Nam Sung Industries, is debat

Question

The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The project's expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 11%. The current exchange rate is 1,062 won per U.S. dollar.

Risk-free interest rates in the United States and S. Korea are:

1-Year

United States 3%,  S. Korea 2%

2-Year

United States 3.5% S. Korea 2.5%

A. If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value generated by this project? Round your answer to the nearest cent. = $

B. What would be the rate of return generated by this project? Round your answer to two decimal places. = %

C. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places. = won per U.S. $

D. What is the expected forward exchange rate 2 years from now? Round your answer to two decimal places. = won per U.S. $

E. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Solitaire? Round your answers to two decimal places. Two answers: e1.= NPV in won e2. = Rate of return %

Explanation / Answer

Particulars Present Value Initial Cash outflow=1000000*1.062 1062000 1062000.00 Cash Inflow=700000*1.062 ( discounr @2%) 743400 728823.53 Cash Inflow=600000*1.062 (discount @2.5%) 637200 621658.54 Net Present Value(Nam Sung Industries) 288482.07 Initial Cash outflow=1000000 1000000 1000000.00 Cash Inflow=700000( discount @3%) 700000 679611.65 Cash Inflow=600000(discount @3.5%) 600000 579710.14 A.Net Present Value(US Company) 259321.80 B.Rate of Return in case of US company=(259321.80/1000000)*100 25.93218 C. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places. = won per U.S. $,=1.062*(1.02) 1.08324 D. What is the expected forward exchange rate 2 years from now? Round your answer to two decimal places. = won per U.S. $,=1.062*(1.025) 1.08855 E. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Solitaire? Round your answers to two decimal places. Two answers: e1.= NPV in won e2. = Rate of return %, 288482.1 Rate of Return=(288482.1/1062000)*100 27.16404

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