Blue Dart, an India based company, is considering expanding its operations into
ID: 2671430 • Letter: B
Question
Blue Dart, an India based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is 10 million. The firm forecasts total cash inflows of 4 million per year for 2 years, 6 million for the next two years, and then a possible terminal value of 8 million. In addition, due to political risk factors. Blue Dart believes that there is a 50 percent chance that the gross terminal value will be only 2 million and that there is a 50 percent chance that it will be 78 million. However, the government of the host country will block 20 percent of all cash flows. Thus, cash flows that can be repatnated are 80 percent of those projected. Blue Darts' cost of capital is 15 percent, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?Explanation / Answer
Cash flow for first two years considering the government of the host country block 80% of the funds = 4million * 80% = 3.2 million each year Cash flow for third and fourth year considering the government of the host country block 80% of the funds = 6million * 80% = 4.8 million each year Terminal value at the end of the 4th year = 0.5*2 + 0.5*8 = 5million = 5 million * 80% = 4 million after considering the the government of the host country block 80% of the funds Therefore the NPV will be = {3.2/(1.16) + 3.2/(1.16)^2 + 4.8/(1.16)^3 + 4.8/(1.16) ^4 + 5/(1.16)^5} - 10 = (2.7586 - 2.378121 - 3.075157 - 2.650997 - 2.761455) - 10 = 3.62 answer happy to help