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You are working for the Swedish car manufacturer Volvo Group that is considering establishing a...

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Accounting

You are working for the Swedish car manufacturer Volvo Group that is considering establishing a three-year project in Sri Lanka with a 2.5 million initial investment. The project is expected to generate cash flow of Rs. 150 million in Year 1 and Year 2, and Rs. 250 million in Year 3. The end of the project salvage value is Rs. 210 million. There is a 20 percent withholding tax. All cash flows are remitted to the parent. Sri Lankan government has a restriction: you are not allowed to send funds to the parent in Sweden for the first 2 years. Funds can only be sent to the Swedish parent firm in Year 3. You earn 4 percent interest by investing the funds in the Sri Lankan money market. Your supervisor, Walter White, has a given you a task to figure out whether Volvo should invest in this project. Your team has forecasted a stable exchange rate of Rs. 220/ over the next three years.

  • What is the implied required rate of return for Volvo? Assume that the CAPM is the true model for your calculations. Assume that the risk-free rate is 2.0 percent. Show calculations.

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