ABC Coal INC., a U.S. based company, is considering expanding its operations into a European country which is very unstable due to political problems. The required investment at Time = 0 is $650,000. The firm forecasts total cash inflows of ?100,000 per year for 2 years, ?200,000 for the next 2 years, and then a possible terminal value of ?500,000 in year 5. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only ?250,000 and a 50% chance that it will be ?500,000. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen's cost of capital is 12.5%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Currently a ? is trading for $1.31 and the forecasted exchange rate between dollar and euro for year 1, 2,3,4 & 5 will be $1.34, $1.36, $1.30, $1.45 and $1.5 respectively. Under these conditions: A. (5 pts) What is the project?s NPV? B. (5 pts) Find IRR. C. (2 pts) Should you accept the project? Why or Why not? Explain fully.
DATE
Question answered on Jul 22, 2018
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