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How large does the approximate probability of expropriation

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Question - Suppose a firm projects cash flows of $2.218 million, $2.827 million, and $4 million for years 1, 2, and 3, respectively, on an initial investment in Ecuador of $21.8 million. The firm projects a perpetuity of $5 million in years 4 and beyond. If the required return on this investment is 17%, how large does the approximate probability of expropriation in year 5 have to be before the investment has a negative NPV? Expected compensation in the event of expropriation is $3 million.

Reference no: EM132790687

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