A project in South Korea required an initial investment of 2 billion South Korea

Question

A project in South Korea required an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion and 4 billion Won in two years of operation respectively. The project has no salvage value. The current value of the won is 1100 won per U.S dollar, and the value of the won is expected to remain constant over the next two years. A) from parent's perspective, what is the NPV of this project if the required rate of return is 13%? B) repeat the question, expect assume that the value of the won is expected to be 1200 won per U.S dollar after two years. Further assume that the funds are blocked and that the parent company will only be able to remit them to the U.S in two years. How dose this affect the NPV of project? A project in South Korea required an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion and 4 billion Won in two years of operation respectively. The project has no salvage value. The current value of the won is 1100 won per U.S dollar, and the value of the won is expected to remain constant over the next two years. A) from parent's perspective, what is the NPV of this project if the required rate of return is 13%? B) repeat the question, expect assume that the value of the won is expected to be 1200 won per U.S dollar after two years. Further assume that the funds are blocked and that the parent company will only be able to remit them to the U.S in two years. How dose this affect the NPV of project? A) from parent's perspective, what is the NPV of this project if the required rate of return is 13%? B) repeat the question, expect assume that the value of the won is expected to be 1200 won per U.S dollar after two years. Further assume that the funds are blocked and that the parent company will only be able to remit them to the U.S in two years. How dose this affect the NPV of project?

Explanation / Answer

FIRST OF ALL WE HAVE TO CONVERT THE CURRENCY RATE INTO DIRECT RATE I;E DOLLAR PER WON

1.100 WON PER DOLLAR

= 1/1.100

= $0.9091 PER WON

1.2000 WON PER DOLLAR

= 1/1.200

= $0.8333 PER WON

A./

B./

NPV HAS DECEREASED BY $6931520

YEAR CASH FLOW (IN WON) CASH FLOW (IN $) DISCOUNTING FACTOR DISCOUNTED CASH FLOW 0 -20000000 -18182000 1.0000 -$18182000 1 30000000 27273000 0.8849 $24133878 2 40000000 36364000 0.7831 $28476648 NPV $34428526

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