The South Korean multinational manufacturing firm, Nam Sung Industries, is debat
ID: 2753712 • Letter: T
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 project's expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 12%. The current exchange rate is 1,062 won per U.S. dollar.
Risk-free interest rates:
United States 1 Yr- 5% 2 Yr- 4%
S. Korea 1-Year- 4% 2 Yr- 3%
Question: If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Solitaire?
NPV won Rate of return %Explanation / Answer
Ans:
NPV-
Year 1 - 700000 x (1/1.126^1) = 625000
Year 2 - 600000 x (1/1.12^2) = 478316
Gross NPV = 11,03,316
Cash Outflow = 10,00,000
NPV = 103316$
WoN = 103316 x 1062
= 10,97,21,592 Won
Rate of Retunrs = Net Cash Flow / Investments x 100
= 109721592 / 1062000000* x 100 = 10.33%
* 1062 x 1000000
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