A U.S. Company is considering the establishment of a subsidiary in Norway. The i

Question

A U.S. Company is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, the U.S. company would terminate the project after four years. The company's cost of capital is 13% and the project is of the same risk as existing projects. All cash flows generated from the project will be remitted to the parent at the end of the year. The estimated cash flows are as folows:
year 1: NOK 10,000,000 and exchange rate forecast $.13
year 2: NOK 15,000,000 and exchange rate forecast $.14
year 3: NOK 17,000,000 and exchange rate forecast $.12
year 4: NOK 20,000,000 and exchange rate forecast $.15
Calculate the net present value.

Explanation / Answer

Years 0 1 2 3 4 Cash flows 5000000 76923077 107142857 141666667 133333333 Discounting 0.884956 0.7831467 0.6930502 0.6133187 Present value 68073519 83908573 98182106 81775830 Total present value 326940029.3

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