Reference no: EM132972469

Question - 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 15 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. The withholding tax rate in Norway is 10%. 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

What is the net present value of the Norwegian project?

Assume that there is NOK10,000,000 salvage value. What is the cash flow to the parent company in the fourth year? (Assume there is no capital gains tax.)

Assume that there is NOK10,000,000 salvage value. What is the net present value of this project if the salvage value is incorporated? (Assume there is no capital gains tax.)