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Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project after four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps's existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps's exchange rate forecasts for the Norwegian kroner over the project's lifetime are listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 a. What is the net present value of the Norwegian project? SHOW all work and calculator keystrokes or attached excel. b. Assume that NOK8,000,000 of the cash flow in Year 4 represents the salvage value. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is how much? Show work c. Baps is also uncertain regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV) of this project if a 16 percent cost of capital is used instead of 13 percent? Show work and briefly discuss.

Sagot :

Net present value is $1,048,829, salvage value is 0, net present value is $ 645,146.70.

Give a brief account on NPV.

A series of cash flows that happen at various dates are subject to the net present value (NPV) or net present worth (NPW). The amount of time until a cash flow is expected determines its present value. The discount rate also plays a role. NPV explains how much money has a temporal worth. It offers a tool for assessing and contrasting capital projects or financial products with cash flows distributed over time, such as loans, investments, insurance contract payouts, and many more applications.

To solve the question :

a. NPV of the Norwegian project.

Before calculating the net present value, we first convert the cash flows into US dollars as shown in the table below.

Year   Currency   Cash flow    Cash flow in $         Discounted value at 13%

0            $             -5000000        -5000000              -5000000.00

1         NOK              10000000       1300000                   1150442.48

2        NOK             15000000       2100000                 1644608.04

3        NOK              17000000      2040000                 1413822.33

4        NOK               20000000     3000000                 1839956.18

NPV                                                   $ 1,048,829.03

The NPV is $1,048,829

b. To calculate break even salvage value :

Since the salvage value of 8,000,000,000 NOK is uncertain, the cash flow in year four is only 12,000,000 NOK. We are assuming the salvage value to be 0.

The NPV is as shown below:

Year   Currency     Cash flow     Cash flow in     Discounted value at 13%

0         $               -5000000              -5000000                -5000000.00

1        NOK            10000000              1300000                 1150442.48

2       NOK           15000000               2100000                 1644608.04

3      NOK           17000000                2040000                 1413822.33

4      NOK            12000000                 1800000                 1103973.71

NPV                                                $ 3,12,846.55

The project has a positive NPV even with no salvage value. Therefore, we can conclude that the break-even salvage value is 0.

c. The NPV of the project at 16% is depicted below :

Year  Currency    Cash flow   Cash flow in $ Discounted value at 13%

0        $               -5000000       -5000000        -5000000.00

1      NOK             10000000        1300000         1120689.66

2      NOK             15000000        2100000         1560642.09

3      NOK             17000000       2040000          1306941.65

4      NOK            20000000       3000000         1656873.29

NPV                                                  $  645,146.70

To know more about, NPV, visit :

https://brainly.com/question/29423457

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