A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the

Question

A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value (NPV). a. lower b. increase c. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV d. increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount e. none of the above

Explanation / Answer

Company should lower the estimates because it will increase the discount rate which impact the NPV and drag it down to lower value.

Correct option is option A.

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