Reference no: EM132937079
Assume that B Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, B Corp. would terminate the project after four years. B's cost of capital is 13%, and the project is of the same risk as B'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
Problem a. Refer to above information. What is the net present value of the Norwegian project? Briefly discuss.
Problem b. Refer to above information. Assume that NOK 8,000,000 of the cash flow in year 4 represents the salvage value. B Corp. is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value? Briefly discuss.
Problem c. Refer to above information. B Corp. is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%? Briefly discuss.