90.2K

Verified Solution

Link Copied!

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 10%. The current exchange rate is 1,055 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:

	1-Year	2-Year
U.S.	3.0%	5.75%
S. Korea	2.0%	4.75%

1. 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? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $

   What would be the rate of return generated by this project? Do not round intermediate calculations. Round your answer to two decimal places.

   %

2. What is the expected forward exchange rate 1 year from now? (Hint: Take the perspective of the Korean company when identifying home and foreign currencies and direct quotes of exchange rates.) Do not round intermediate calculations. Round your answer to two decimal places.

   won per U.S. dollar

   What is the expected forward exchange rate 2 years from now? (Hint: Take the perspective of the Korean company when identifying home and foreign currencies and direct quotes of exchange rates.) Do not round intermediate calculations. Round your answer to two decimal places.

   won per U.S. dollar

3. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Nam Sung? Do not round intermediate calculations. Enter your answer for the net present value in millions. For example, an answer of 1.23 million won should be entered as 1.23, not 1,230,000. Round your answers to two decimal places.

   NPV: million won

   Rate of return: %

Answer & Explanation Solved by verified expert

See Answer