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5. Chen Transport, a U.S. based company, is considering expanding its
operations into a foreign country. The required investment at Time = 0 is
$10 million. The firm forecasts total cash inflows of $4 million per year
for 2 years, $6 million for the next 2 years, and then a possible terminal
value of $8 million. In addition, due to political risk factors, Chen
believes that there is a 50% chance that the gross terminal value will be
only $2 million and a 50% chance that it will be $8 million. 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 15%, but it adds one percentage point to all
foreign projects to account for exchange rate risk. Under these
conditions, what is the project’s NPV?
a. $1.01 million
b. $2.77 million
c. $3.09 million
d. $5.96 million
e. $7.39 million
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FIN 534 Week 10 DQ 1
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