5. J&J;, a U.S. firm, would need to spend $400,000 today on expenses related to

Question

5. J&J;, a U.S. firm, would need to spend $400,000 today on expenses related to its consulting services to Jacobee Company (in France) to improve Jacobee's performance. In ive payment from Jacobee, which will be tied to Jacobee's ne vear, & performance during the year. There is uncertainty about Jacobee's performance and about Jacobee's tendency for corruption. J&J; expects that it will receive 800,000 euros if Jacobee achieves strong performance following the consulting job. However, there are two forms of country rislk that are a concern to J&J; Co. There is a 50 percent chance that Jacobee willachieve strong performance. There is a 50 percent chance that Jacobee willperform poorly and in this case. J&J; will receive a payment of only 480,000 euros. While there is a 60 percent chance that Jacobee will make its payment to J&J;, there is a 40 percent chance that Jacobee will become corrupt, and in this case, Jacobee will not submit any payment to J&J; Assume that the outcome of Tacobee's performance is independent of whether Tacobee becomes corrupt The prevailing spot rate of the euro is $1.20 per euro, but J&] expects that the euro will depreciate by 15 percent in one year, regardless of Jacobee's performance or whether it is corrupt. J&J;'s cost of capital is 18%, what is the expected value of the project's net present value? (1.5 Points) a. -$93.559.32 b. -$68,067.80 c. $68,067.80 d. $306,440.68 lculation Steps

Explanation / Answer

Option B is right

Strong performance Poor performance 50% 50% Actual fee in euros 800000 480000 Uncertainity 400000 240000 Remaining 400000 240000 60% uncertainity of making payment 240000 144000 PV factor of 1 year @ 18% 0.847457627 0.847457627 Pv of the fee in $ 203389.8305 122033.8983 Total in euros 325423.7288 Present value of euro 1.2 less 15% 1.02 Total Pv of fee in $ is 331932.2034 Investment 400000 NPV -68067.79661

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