42.

NPV of foreign investment cash flows Answer: b Diff: T

Time line (in millions):

0 1 2 3 4 5 Years
k = 16%

-10 4 4 6 6 5* Projected cash flows

NPV=? 3.2 3.2 4.8 4.8 4 Unrestricted flows

*Calculate the expected terminal value cash flow:

Expected terminal cash flow (CF5) = 0.5($8) + 0.5($2) = $4 + $1 = $5.

Calculate the unrestricted cash flows that can be repatriated to the parent
firm:
Unrestricted cash flows = Projected cash inflows  0.80.

Numerical solution (in millions):

Unrestricted
Projected Percent Repatriable
Year Cash Flow Unrestricted Cash Flows
1 $4 0.80 $3.2
2 4 0.80 3.2
3 6 0.80 4.8
4 6 0.80 4.8
5 5 0.80 4.0

$3.2 $3.2 $4.8 $4.8 $4

NPV = -$10.0 + + + + +
(1.16) (1.16)2 (1.16)3 (1.16)4 (1.16)5
= -$10.0 + $2.75862 + $2.37812 + $3.07516 + $2.65100 + $1.90445
= $2.76735  $2.77 million.

Financial calculator solution (In millions):

Inputs: CF0 = -10.0; CF1 = 3.2; Nj = 2; CF2 = 4.8; Nj = 2; CF3 = 4.0;
I = 16.
Output: NPV = $2.767  $2.77 million.

43. Forward market hedge Answer: e Diff: T R

Obligation is for 200,000  0.65 £ = 130,000 £.

130,000/0.60 = cost of forward contract = $216,666.67.
Spot rate in 90 days = 0.55£ per U.S. dollar.
130,000/0.55 = cost of spot rate in 90 days = $236,363.64.
Spot cost - forward cost = $236,363.64 - $216,666.67 = $19,696.97.

Chapter 19 - Page 24