Question

Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?

a. $1.01 million

b. $7.39 million

c. $2.77 million

d. $5.96 million

e. $3.09 million

Answer 1

Terminal Value = ($2 million * 50%) + ($8 million * 50%) = $5 million

Calculation of NPV of the Project				(In million)
Particulars	0	1	2	3	4
Initial Investment
Cost of investment (A)	-10
Operating Cash Flows
Cash Flows (B)		4	4	6	11
Amount can be repatriated (C = B*80%)		3.2	3.2	4.8	8.8
Total Cash Flows (D = A+C)	-10	3.2	3.2	4.8	8.8
Discount Factor @16% (E) 1/(1+16%)^n n=0,1,2,3,4	1	0.862068966	0.743162901	0.640657674	0.552291098
Discounted Cash Flows (F = D*E)	-10	2.759	2.378121284	3.075156833	4.860161661
NPV of the project	3.072060468
Therefore, Project's NPV is $3.09 million
Option e is correct