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 10%. The current exchange rate is 1,073 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:

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.
$   

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

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

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

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.

1-Year 2-Year United States 5% 7% S. Korea 4% 6%

Explanation / Answer

Cost of Capital for Korean Firm = 10%

Risk Free rate = 6%

Premium for risk = 4%

Cost of capital for US firm = 7% + 4% = 11%

NPV is the sum of discounted cash flows = $117604.09

Rate of Return can be found out using the IRR function of excel.

IRR = 20%

Expected Forward rate 1 year from now = Spot Rate * (1 + RFRK)/(1 + RFRUS)

                                                                      = 1073 * (1 + 4%)/(1 + 5%) = 1062.78 won per USD

Expected Forward rate 2 years from now = Spot Rate * (1 + RFRK)2/(1 + RFRUS)2

                                                                      = 1073 * (1 + 6%)2/(1 + 7%)2 = 1053.04 won per USD

If If Nam Sung undertakes the project, the cash flows will be like:

NPV is the sum of discounted cash flows = 125483140.50 won

Rate of Return = IRR = 18.87%

Year Cash Flow Discounted Cash Flow 0 -1000000 -1000000 1 700000 630630.63 2 600000 486973.46 NPV 117604.09

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