Foreign Capital Budgeting The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest...

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Finance

Foreign Capital Budgeting
The South Korean multinational manufacturing firm, Nam SungIndustries, is debating whether to invest in a 2-year project inthe United States. The project's expected dollar cash flows consistof an initial investment of $1 million with cash inflows of$700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted costof capital for this project is 12%. The current exchange rate is1,054 won per U.S. dollar. Risk-free interest rates in the UnitedStates and S. Korea are:
1-Year 2-Year
U.S. 4.0% 4.75%
S. Korea 3.0% 3.75%
If this project were instead undertaken by a similar U.S.-basedcompany with the same risk-adjusted cost of capital, what would bethe net present value generated by this project? Do not roundintermediate calculations. Round your answer to the nearest dollar.
$
What would be the rate of return generated by this project? Donot round intermediate calculations. Round your answer to twodecimal places.
    %
What is the expected forward exchange rate 1 year from now?(Hint: Take the perspective of the Korean company whenidentifying home and foreign currencies and direct quotes ofexchange rates.) Do not round intermediate calculations. Round youranswer 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 whenidentifying home and foreign currencies and direct quotes ofexchange rates.) Do not round intermediate calculations. Round youranswer to two decimal places.
   won per U.S. dollar
If Nam Sung undertakes the project, what is the net presentvalue and rate of return of the project for Nam Sung? Do not roundintermediate calculations. Enter your answer for the net presentvalue in millions. For example, an answer of 1.23 million wonshould be entered as 1.23, not 1,230,000. Round your answers to twodecimal places.
NPV:  million won
Rate of return:   %

Answer & Explanation Solved by verified expert

4.1 Ratings (790 Votes)

From the above we getY0Y1Y2InitialInvestment 1000000CashFlow700000600000Risk free rates1year2yearUS4475SKorea3375Risk adjusted cost of capital12Exchangerate1054a If See Answer

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Transcribed Image Text

Foreign Capital BudgetingThe South Korean multinational manufacturing firm, Nam SungIndustries, is debating whether to invest in a 2-year project inthe United States. The project's expected dollar cash flows consistof an initial investment of $1 million with cash inflows of$700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted costof capital for this project is 12%. The current exchange rate is1,054 won per U.S. dollar. Risk-free interest rates in the UnitedStates and S. Korea are:1-Year2-YearU.S.4.0%4.75%S. Korea3.0%3.75%If this project were instead undertaken by a similar U.S.-basedcompany with the same risk-adjusted cost of capital, what would bethe net present value generated by this project? Do not roundintermediate calculations. Round your answer to the nearest dollar.$ What would be the rate of return generated by this project? Donot round intermediate calculations. Round your answer to twodecimal places. %What is the expected forward exchange rate 1 year from now?(Hint: Take the perspective of the Korean company whenidentifying home and foreign currencies and direct quotes ofexchange rates.) Do not round intermediate calculations. Round youranswer to two decimal places. won per U.S. dollarWhat is the expected forward exchange rate 2 years from now?(Hint: Take the perspective of the Korean company whenidentifying home and foreign currencies and direct quotes ofexchange rates.) Do not round intermediate calculations. Round youranswer to two decimal places. won per U.S. dollarIf Nam Sung undertakes the project, what is the net presentvalue and rate of return of the project for Nam Sung? Do not roundintermediate calculations. Enter your answer for the net presentvalue in millions. For example, an answer of 1.23 million wonshould be entered as 1.23, not 1,230,000. Round your answers to twodecimal places.NPV: million wonRate of return: %