Foreign Capital Budgeting The South Korean multinational manufacturing firm, Nam

Question

Foreign Capital Budgeting

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 10%. The current exchange rate is 1,060 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:

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 generated by this project? Round your answer to the nearest cent.
$  

What would be the rate of return generated by this project? Round your answer to two decimal places.
   %

What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places.
   won per U.S. $

What is the expected forward exchange rate 2 years from now? Round your answer to two decimal places.
   won per U.S. $

If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Solitaire? Round your answers to two decimal places.

1-Year 2-Year United States 3% 7.25% S. Korea 2% 6.25%

Explanation / Answer

                     f = s ×

                     f = s ×

A Year Cash Flow PV factor@10% PV of cash Inflows 0 1000000 1 -1000000 1 700000 0.909 636363.64 2 600000 0.826 495867.77 NPV 132231.40 B Rate of Return CAGR   =   (EV/BV)1/n - 1 where: EV = The investment's ending value BV = The investment's beginning value n = Years 0.3 C

                     f = s ×

1 + id n 1 + if Where, f, s and n stand for the same as stated above; Id domestic interest rate; and If is foreign interest rate. 1113 D

                     f = s ×

1 + id n 1 + if Where, f, s and n stand for the same as stated above; Id domestic interest rate; and If is foreign interest rate. 2226 E Year Cash Flow PV factor@10% PV of cash Inflows 0 1060000000 1 -1060000000 1 779100000 0.909 708272727.27 2 1335600000 0.826 1103801652.89 NPV 752074380.17 Rate of Return CAGR   =   (EV/BV)1/n - 1 where: EV = The investment's ending value BV = The investment's beginning value n = Years 0.63

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