Problem 17-14 Foreign Capital Budgeting The South Korean multinational manufactu
ID: 2719160 • Letter: P
Question
Problem 17-14
Foreign Capital Budgeting
The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The project's expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 13%. The current exchange rate is 1,053 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:
If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value generated by this project? Round your answer to the nearest cent.
$
What would be the rate of return generated by this project? Round your answer to two decimal places.
%
What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places.
won per U.S. $
What is the expected forward exchange rate 2 years from now? Round your answer to two decimal places.
won per U.S. $
If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Solitaire? Round your answers to two decimal places.
1-Year 2-Year United States 4% 6.5% S. Korea 3% 5.5%Explanation / Answer
SOLUTION :
year
CASH FLOW
Discount factor @13%
PV
0
-1000000
1
-1000000
1
700000
0.884955752
619,469.03
2
600000
0.783146683
469,888.01
NPV
89,357
RATE OF RETURN (700000+600000-1000000)/1000000
15.00%
expected forward exchange rate 1 year from now
$
WON
SPOT RATE
1
1053
ADD :INTEREST
4%
3%
FORWARD RATE
1.04
1084.59
FORWARD RATE
1
1,042.88
expected forward exchange rate 2 years
$
WON
SPOT RATE
1
1053
ADD :INTEREST
6.50%
5.50%
FORWARD RATE
1.065
1110.915
FORWARD RATE
1
1,043.11
year
$ CASH FLOW
Discount factor @13%
PV ($)
PV (IN WON)
0
-1000000
1
-1000000
-1053000000
1
700000
0.884955752
619469.0265
646,028,761.06
2
600000
0.783146683
469888.01
490,146,139.58
NPV
89357.03657
83174900.65
RATE OF RETURN
28.76%
(700000*1042.88+600000*1043.11-1000000*1053)/(100000*1053)
year
CASH FLOW
Discount factor @13%
PV
0
-1000000
1
-1000000
1
700000
0.884955752
619,469.03
2
600000
0.783146683
469,888.01
NPV
89,357