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?

Answers a. $89,357; 20% b.1,039.90 won per U.S. dollars and 1029.95 won per U.S. dollars c. $78,150,661 won; 18.85%

PLEASE SHOW WORK

Explanation / Answer

0 -1000000 1 -1000000 13% 1 2 1 700000 0.884955752 619469.0265 US 4% 4.25% 2 600000 0.783146683 469888.01 S.Korea 3% 3.25% 20.00% 89357.03657 Year 0 1050 1 1039.90 1050*(1.03/1.04) 2 1029.95 1039.90(1.0325/1.0425) 0 -1.1E+09 1 -1050000000 1 7.28E+08 0.884955752 644185840.7 2 6.18E+08 0.783146683 483961155.9 18.85% 78146996.63

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