The South Korean multinational manufacturing firm, Nam Sung Industries, is debat
ID: 2766162 • Letter: T
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 1,060 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:
1-Year 2-Year United States 3% 7.25% S. Korea 2% 6.25%Explanation / Answer
Calculation of NPV of the project:
Year
Cash flow
Amount
PVF
Discounted Cash flow
0
Initial Investment
(1,000,000)
1
(1,000,000.00)
1
Cash inflow
700,000
0.970873786
679,611.65
2
Cash inflow
600,000
0.905243624
543,146.17
NPV of project
$222,757.82
Current exchange rate = 1,060 won per US dollar
NPV of project = $222,757.82 * 1060
NPV of Project = 236,123,289 won’s
Since the NPV of the project is Positive, The South Korean multinational company can invest in project.
Year
Cash flow
Amount
PVF
Discounted Cash flow
0
Initial Investment
(1,000,000)
1
(1,000,000.00)
1
Cash inflow
700,000
0.970873786
679,611.65
2
Cash inflow
600,000
0.905243624
543,146.17
NPV of project
$222,757.82
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