Reference no: EM132953430

Question - Barker company, a US based MNC is contemplating a foreign capital expenditure on a subsidiary in Botswana Africa that would produce and sell tennis rackets locally. Barker financial managers have asked the manufacturing marketing and financial apartments to provide them with relevant inputs so they can apply a capital budgeting analysis. In addition some barker executives have met with government officials in Botswana to discuss the proposed subsidiary. The initial cost of the project in thousands is BWP 16,009 where BWP represents the Botswana pula the local currency. Operating cash flow will begin one year from today and are remitted back to the parent at the end of each year. The annual cash flows over the four year economic life of the project in BWP are estimated to be 2,000 4,000 5,000 and 7,000 respectively. The Botswana government will also pay Barker BWP 4,500 at the end of the four years to assume ownership of the subsidiary. This payment will also be remitted back to the parent in the us. Barker has a required rate return of 10 percent. The current spot rate of the BWP to the dollar is BWP 1 = 0.14. The pula is expected to depreciate by 5% each year over the life of the project.

a. What are the BWP/USD conversion rates for year 1-4?

b. What is the net present value on this project in USD?

c. Using net present value as the sole decision criterion should barker engage in the foreign capital expenditure in the subsidiary in Botswana?

d. What is the amount in pula that Botswana government would need to pay at the end of four years for barker to break even?

e. If the internal rate of return were to increase, how would it affect the decision to engage in foreign capital expenditure in the subsidiary in Botswana?