The South Korean multinational manufacturing firm, Nam Sung Industries, is debat

Question

The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The projects expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 13%. The current exchange rate is 1,050 won per U.S dollar. Risk free interest rates in the United States and S. Korea are:

U.S. 1-year 4.0% 2-year 4.25% S.

Korea 1-year 3.0% 2-year 3.25%

A. If this project were instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?

B. What is the expected forward exchange rate 1 year from now and 2 years from now? (hint: take the perspective of the Korean company when identifying home and foreign currencies and direct quotes of exchange rates.)

C. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Nam Sung?

PLEASE SHOW WORK

Explanation / Answer

A. If this project were instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital. The net present value is $89,357 and rate of return generated by this project is 20% as follows.

By using spreadsheet ot trail and error method we can found IRR of this undiscounted cashflow is 20%.

B. What is the expected forward exchange rate 1 year from now and 2 years from now?

3. C. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Nam Sung?

According to me NPV of the project is $78,139,394 and IRR is 18.85%

Year Cash flows$ PVF @13% PV $ 0       (1,000,000)        1.0000       (1,000,000) 1           700,000        0.8850           619,469 2           600,000        0.7831           469,888 IRR = 20% NPV =            89,357

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