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Calculation Of NPV For A Project With Inflow, Outflow And Foreign Exchange Rate Given

Question

Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is NOK40 million. If the project is undertaken, Baps would terminate the project after four years. Baps' (US dollar) cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All net cash flows generated from the project will be remitted to the parent at the end of each year. Listed separately below are the estimated cash inflows and outflows the Norwegian subsidiary will generate over the project's lifetime in millions of Norwegian kroner (NOK), and Baps forecast of future exchange rates. The current exchange rate of the Norwegian kroner is $0.135/NOK. What is the NPV, in $, of the Norwegian project?

Year

1

2

3

4

Inflow

NOK18

NOK25

NOK29

NOK40

Outflow

NOK8

NOK10

NOK12

NOK15

FX rate

$0.13/NOK

$0.14/NOK

$0.12/NOK

$0.15/NOK

 

Summary

The question belongs to Finance and it discusses about calculation of NPV for a project with inflow, outflow and foreign exchange rate given.

Total Word Count 78

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