Tashakori Trucking, a U.S.-based company, is considering expanding its operation

Question

Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $5 million. In addition, due to political risk factors, Tashakori believes that the gross terminal value will be only $5 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?

Explanation / Answer

Hi,

Please find the answer as follows:

Cost of Capital will be 15+1 = 16% (as mentioned in the question for foriegn projects).

NPV = -10 + 4*(1-.20)/(1+.16)^1 + 4*(1-.20)/(1+.16)^2 + 6*(1-.20)/(1+.16)^3 + 6*(1-.20)/(1+.16)^4 + 5*(1-.20)/(1+.16)^5 = 2.77 million

Thanks.

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