UNSW Business School

FINS3616 International Business Finance

Term 1 2019
Political Risk Practice Problems (10 Randomized Variations)
 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $40.00m $90.00m $130.00m $165.00m

The project would require an initial up-front investment of $101.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 17.0% per annum.
Question 1

Given the above, what is the NPV of the project? Would you accept the project?

Question 2

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
25% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 17.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 1 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 3

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$6.00 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 4

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 2 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $45.00m $85.00m $130.00m $165.00m

The project would require an initial up-front investment of $77.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 19.0% per annum.
Question 5

Given the above, what is the NPV of the project? Would you accept the project?

Question 6

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
30% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 19.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 3 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 7

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$7.30 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 8

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 4 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $40.00m $90.00m $135.00m $160.00m

The project would require an initial up-front investment of $113.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 24.0% per annum.
Question 9

Given the above, what is the NPV of the project? Would you accept the project?

Question 10

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
15% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 24.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 5 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 11

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$4.90 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 12

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 6 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $40.00m $90.00m $130.00m $155.00m

The project would require an initial up-front investment of $85.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 21.0% per annum.
Question 13

Given the above, what is the NPV of the project? Would you accept the project?

Question 14

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
25% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 21.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 7 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 15

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$6.80 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 16

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 8 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $30.00m $85.00m $135.00m $170.00m

The project would require an initial up-front investment of $100.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 17.0% per annum.
Question 17

Given the above, what is the NPV of the project? Would you accept the project?

Question 18

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
25% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 17.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 9 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 19

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$4.70 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 20

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 10 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $45.00m $90.00m $125.00m $160.00m

The project would require an initial up-front investment of $78.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 15.0% per annum.
Question 21

Given the above, what is the NPV of the project? Would you accept the project?

Question 22

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
35% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 15.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 11 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 23

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$3.80 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 24

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 12 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $55.00m $105.00m $150.00m $180.00m

The project would require an initial up-front investment of $140.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 25.0% per annum.
Question 25

Given the above, what is the NPV of the project? Would you accept the project?

Question 26

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
15% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 25.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 13 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 27

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$4.50 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 28

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 14 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $40.00m $85.00m $145.00m $170.00m

The project would require an initial up-front investment of $80.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 13.0% per annum.
Question 29

Given the above, what is the NPV of the project? Would you accept the project?

Question 30

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
35% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 13.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 15 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 31

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$6.30 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 32

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 16 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $50.00m $105.00m $165.00m $200.00m

The project would require an initial up-front investment of $149.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 18.0% per annum.
Question 33

Given the above, what is the NPV of the project? Would you accept the project?

Question 34

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
20% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 18.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 17 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 35

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$3.80 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 36

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 18 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

The following information is used for the next FOUR questions.

Your firm is considering launching its new product, the sentient Butter Robot
C137, in the far off lands of The Citadel. The Butter Robot’s raison d’être is to
serve sticks of butter to humans at the dining table. You estimate that the project
will provide the following annual free cash flows (FCFs):

Year 1 Year 2 Year 3 Year 4

FCF $40.00m $95.00m $130.00m $160.00m

The project would require an initial up-front investment of $136.00 million. In

addition, you estimate that the appropriate cost of capital for butter robot projects
of this risk class is 13.0% per annum.
Question 37

Given the above, what is the NPV of the project? Would you accept the project?

Question 38

Due to the recent collision of The Citadel with a Galactic Federation prison, The
Citadel is currently experiencing a severe fiscal crisis and the ruling council has
threatened to nationalize foreign-owned assets. You now estimate that there is a
20% chance in any given year that your project assets will be expropriated without
compensation. The cost of capital of 13.0% p.a. used in the previous question
does not factor in any such risk of expropriation.
What is the NPV of your project now? Would you accept the project?

FINS3616 2019 T1 19 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Question 39

Your Federation Insurance Bureau contact, Jerry Smith, informs you that your
firm can be provided with political risk insurance. This would compensate your
firm with today’s estimate of the uninsured project’s NPV at the end of the year
in which your assets were seized. The insurance contract requires payment of its
$5.40 million annual fee at the start of each year of coverage.
What is the NPV of your project now? Would you insure the project?

Question 40

By how much does the insurance contract increase or decrease the NPV of the
project?

FINS3616 2019 T1 20 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Partial Solutions
Answer 1:

The NPV of the project is $168.15 million.

As the NPV is positive, we would accept the project.

Answer 2:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$101.00m $40.00m $90.00m $130.00m $165.00m
Prob-weighted CFs −$101.00m $30.00m $50.62m $54.84m $52.21m

When factoring in the 25% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $23.73 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 3:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$101.00m $40.00m $90.00m $130.00m $165.00m

Insurance Premium −$6.00m −$6.00m −$6.00m −$6.00m

Compensation $23.73m $23.73m $23.73m $23.73m

Prob-weighted CFs −$107.00m $31.43m $51.70m $55.65m $54.71m

The estimated NPV of $23.73m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $21.57m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 4:

The insurance contract decreases the value of the project by $2.15m.

FINS3616 2019 T1 21 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 5:

The NPV of the project is $180.26 million.

As the NPV is positive, we would accept the project.

Answer 6:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$77.00m $45.00m $85.00m $130.00m $165.00m
Prob-weighted CFs −$77.00m $31.50m $41.65m $44.59m $39.62m

When factoring in the 30% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $25.10 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 7:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$77.00m $45.00m $85.00m $130.00m $165.00m

Insurance Premium −$7.30m −$7.30m −$7.30m −$7.30m

Compensation $25.10m $25.10m $25.10m $25.10m

Prob-weighted CFs −$84.30m $33.92m $43.34m $45.78m $42.20m

The estimated NPV of $25.10m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $23.02m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 8:

The insurance contract decreases the value of the project by $2.08m.

FINS3616 2019 T1 22 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 9:

The NPV of the project is $116.27 million.

As the NPV is positive, we would accept the project.

Answer 10:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$113.00m $40.00m $90.00m $135.00m $160.00m
Prob-weighted CFs −$113.00m $34.00m $65.02m $82.91m $83.52m

When factoring in the 15% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $35.52 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 11:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$113.00m $40.00m $90.00m $135.00m $160.00m

Insurance Premium −$4.90m −$4.90m −$4.90m −$4.90m

Compensation $35.52m $35.52m $35.52m $35.52m

Prob-weighted CFs −$117.90m $35.16m $66.01m $83.75m $86.79m

The estimated NPV of $35.52m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $34.03m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 12:

The insurance contract decreases the value of the project by $1.49m.

FINS3616 2019 T1 23 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 13:

The NPV of the project is $155.22 million.

As the NPV is positive, we would accept the project.

Answer 14:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$85.00m $40.00m $90.00m $130.00m $155.00m
Prob-weighted CFs −$85.00m $30.00m $50.62m $54.84m $49.04m

When factoring in the 25% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $28.21 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 15:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$85.00m $40.00m $90.00m $130.00m $155.00m

Insurance Premium −$6.80m −$6.80m −$6.80m −$6.80m

Compensation $28.21m $28.21m $28.21m $28.21m

Prob-weighted CFs −$91.80m $31.95m $52.09m $55.94m $52.02m

The estimated NPV of $28.21m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $26.03m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 16:

The insurance contract decreases the value of the project by $2.18m.

FINS3616 2019 T1 24 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 17:

The NPV of the project is $162.75 million.

As the NPV is positive, we would accept the project.

Answer 18:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$100.00m $30.00m $85.00m $135.00m $170.00m
Prob-weighted CFs −$100.00m $22.50m $47.81m $56.95m $53.79m

When factoring in the 25% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $18.42 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 19:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$100.00m $30.00m $85.00m $135.00m $170.00m

Insurance Premium −$4.70m −$4.70m −$4.70m −$4.70m

Compensation $18.42m $18.42m $18.42m $18.42m

Prob-weighted CFs −$104.70m $23.58m $48.62m $57.56m $55.73m

The estimated NPV of $18.42m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $16.66m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 20:

The insurance contract decreases the value of the project by $1.77m.

FINS3616 2019 T1 25 Peter Kjeld Andersen

 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 21:

The NPV of the project is $202.85 million.

As the NPV is positive, we would accept the project.

Answer 22:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$78.00m $45.00m $90.00m $125.00m $160.00m
Prob-weighted CFs −$78.00m $29.25m $38.02m $34.33m $28.56m

When factoring in the 35% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $15.09 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 23:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$78.00m $45.00m $90.00m $125.00m $160.00m

Insurance Premium −$3.80m −$3.80m −$3.80m −$3.80m

Compensation $15.09m $15.09m $15.09m $15.09m

Prob-weighted CFs −$81.80m $32.06m $39.85m $35.52m $30.01m

The estimated NPV of $15.09m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $16.72m.
As the NPV is more positive when we insure the project than when we don’t, we
would both accept the project and insure it.

Answer 24:

The insurance contract increases the value of the project by $1.64m.

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 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 25:

The NPV of the project is $121.73 million.

As the NPV is positive, we would accept the project.

Answer 26:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$140.00m $55.00m $105.00m $150.00m $180.00m
Prob-weighted CFs −$140.00m $46.75m $75.86m $92.12m $93.96m

When factoring in the 15% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $31.60 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 27:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$140.00m $55.00m $105.00m $150.00m $180.00m

Insurance Premium −$4.50m −$4.50m −$4.50m −$4.50m

Compensation $31.60m $31.60m $31.60m $31.60m

Prob-weighted CFs −$144.50m $47.67m $76.64m $92.78m $96.87m

The estimated NPV of $31.60m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $29.86m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 28:

The insurance contract decreases the value of the project by $1.74m.

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 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 29:

The NPV of the project is $226.72 million.

As the NPV is positive, we would accept the project.

Answer 30:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$80.00m $40.00m $85.00m $145.00m $170.00m
Prob-weighted CFs −$80.00m $26.00m $35.91m $39.82m $30.35m

When factoring in the 35% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $17.34 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 31:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$80.00m $40.00m $85.00m $145.00m $170.00m

Insurance Premium −$6.30m −$6.30m −$6.30m −$6.30m

Compensation $17.34m $17.34m $17.34m $17.34m

Prob-weighted CFs −$86.30m $27.98m $37.20m $40.66m $32.01m

The estimated NPV of $17.34m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $15.40m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 32:

The insurance contract decreases the value of the project by $1.95m.

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 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 33:

The NPV of the project is $172.36 million.

As the NPV is positive, we would accept the project.

Answer 34:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$149.00m $50.00m $105.00m $165.00m $200.00m
Prob-weighted CFs −$149.00m $40.00m $67.20m $84.48m $81.92m

When factoring in the 20% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $26.83 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 35:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$149.00m $50.00m $105.00m $165.00m $200.00m

Insurance Premium −$3.80m −$3.80m −$3.80m −$3.80m

Compensation $26.83m $26.83m $26.83m $26.83m

Prob-weighted CFs −$152.80m $42.33m $69.06m $85.97m $84.67m

The estimated NPV of $26.83m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $28.66m.
As the NPV is more positive when we insure the project than when we don’t, we
would both accept the project and insure it.

Answer 36:

The insurance contract increases the value of the project by $1.83m.

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 FINS3616 Political Risk Practice Problems (10 Randomized Variations)

Answer 37:

The NPV of the project is $162.02 million.

As the NPV is positive, we would accept the project.

Answer 38:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$136.00m $40.00m $95.00m $130.00m $160.00m
Prob-weighted CFs −$136.00m $32.00m $60.80m $66.56m $65.54m

When factoring in the 20% risk of expropriation (without compensation) in any

given year, the NPV of the project is now $26.26 million.
As the NPV is positive even after factoring in the risk of expropriation, we would
accept the project.

Answer 39:

t=0 t=1 t=2 t=3 t=4

Raw Project CFs −$136.00m $40.00m $95.00m $130.00m $160.00m

Insurance Premium −$5.40m −$5.40m −$5.40m −$5.40m

Compensation $26.26m $26.26m $26.26m $26.26m

Prob-weighted CFs −$141.40m $32.93m $61.55m $67.16m $68.22m

The estimated NPV of $26.26m (from the previous question) is the insurance
compensation in the event of expropriation.
The NPV after factoring in the insurance payouts and the up-front insurance fees
is $24.33m.
As the NPV of the insured project is less-positive than the NPV of the uninsured
project, we would accept the project but not insure it.

Answer 40:

The insurance contract decreases the value of the project by $1.93m.

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