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How Country Risk Affects NPV. Hoosier, Inc., is planning a project in the United Kingdom. It would lease space for one year in a

Murrr4er [49]

Answer:

NPV = $11,525.6

Probability the project has negative NPV: 30%

Explanation:

1. When there is no risk:

It is given that the initial British corporate tax rate on income earned by US firms is 40%.

The initial investment: $200,000

The cash flow of Hoosier can be described as following:

+) The addition to the cash flow includes:

Pretax earnings: £300,000

+) The subtraction to the cash flow includes:

Tax on income (40%): £300,000 x 40% = £120,000

=> The cash flow = 300,000 - 120,000 = £180,000 = 180,000 x $1,6 = $288,000

=> The Present value of the project after one year is:

PV = Cash flow/ [(1 + required rate of return)^ 1 year]

= 288,000/ (1+0.18) = $244,068

=> The Net Project Value is:

NPV1 = ∑PV - Initial investment = 244,068 - 200,000 = $44,068

2. Case 2: The British economy may weaken

The initial British corporate tax rate on income earned by US firms is 40%.

The initial investment: $200,000

The cash flow of Hoosier can be described as following:

+) The addition to the cash flow includes:

Pretax earnings: £200,000

+) The subtraction to the cash flow includes:

Tax on income (40%): £200,000 x 40% = £80,000

=> The cash flow = 200,000 - 80,000 = £120,000 = 120,000 x $1,6 = $192,000

=> The Present value of the project after one year is:

PV = Cash flow/ [(1 + required rate of return)^ 1 year]

= 192,000/ (1+0.18) = $162,712

=> The Net Project Value is:

NPV 2= ∑PV - Initial investment = 162,712 - 200,000 = -$37,288

3. Case 3: The British corporate tax rate on income earned by U.S. ﬁrms may increase from 40 to 50 percent

British corporate tax rate on income earned by US firms is 50%.

The initial investment: $200,000

The cash flow of Hoosier can be described as following:

+) The addition to the cash flow includes:

Pretax earnings: £300,000

+) The subtraction to the cash flow includes:

Tax on income (50%): £300,000 x 50% = £150,000

=> The cash flow = 300,000 - 150,000 = £150,000 = 150,000 x $1,6 = $240,000

=> The Present value of the project after one year is:

PV = Cash flow/ [(1 + required rate of return)^ 1 year]

= 240,000/ (1+0.18) = $203,390

=> The Net Project Value is:

NPV3= ∑PV - Initial investment = 203,390 - 200,000 = $3,390

The probability of the case there is no risk = 100% - probability of Case 2 - probability of case 3 = 100% - 30% - 20% = 50%

The expected value of the project’s net present value is:

NPV = probability Case 1 x NPV1 + probability Case 2 x NPV2 + probabilityCase 3 x NPV3

= 50% x 44,068 + 30% x (-37,288) + 20% x 3,390= $11,525.6

As only the NPV of case 2 are negative, so that the probability that the project will have a negative NPV = probability case 2 = 30%

4 0

3 years ago

Who is the mayor of Brisbane

almond37 [142]

The incumbent mayor of Brisbane is Graham Quirk, a Liberal National.

8 0

3 years ago

Read 2 more answers

Who falls into the category of external stakeholders of an organization?

Alex Ar [27]

These are group of individual who may not work in the organization but are very much influenced by the activities of organization. There are the people outside of the company who can have a major impact on it. Examples of stakeholders are government agencies, administrator, customers, suppliers and competitors too.

3 0

3 years ago

a) Take a real time example of a company of your own choice working in Pakistan and then discuss the factors that lead to pressu

RUDIKE [14]

Answer:

This responsiveness also promotes the local market orientation of a subsidiary and therefore the strength of its existing network with the businessmen and government authorities.

Explanation:

Usually, firms working within the global market confront two sorts of competitive pressure. They face pressure to scale back costs and pressure to react locally. These competing forces throw a corporation into conflict. It's going to also need a corporation to supply a consistent product on the international market to downstream the experience curve as soon as feasible. In response to local pressures, however, it's necessary for a firm to differentiate its product offering and marketing strategy from one country to a different in an effort to satisfy the various demands arising from domestic consumer preferences, business practices, channels of distribution, competitive conditions and public policies. Because it's going to entail substantial redundancy and a scarcity of product standards to adapt products to varied domestic needs, the result could also be a rise in prices.

While some organizations, like Company A, face a high to scale back cost and low for the reaction of locally, while others, like Company B, face low to scale back costs and high for local reaction, many companies are within the situation of Company C. It suggests and supports three layers of variables, including environmental, structural, and organizational responsiveness. The analysis of 168 MNE companies within the People's Republic of China shows that environmental complexity and therefore the uniqueness of business culture increase local reaction. Structural variables like the intensity of competition, heterogeneity of demand and localisation of components increase local reaction.

3 0

3 years ago

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a

podryga [215]

Answer:

e. $42,438

Explanation:

The computation of the retained earning is shown below:

Earning after tax = Sales - cost - depreciation expense - interest expense - income tax expense

= $318,400 - $199,400 - $28,600 - $1,100 - $30362

= $58,938

The income tax expense equal to

= (Sales - cost - depreciation expense - interest expense) × tax rate

= ($318,400 - $199,400 - $28,600 - $1,100) × 0.34

= $30362

Now the retained earning equal to

= Earning after tax - dividend paid

= $58,938 - $16,500

= $42,438

7 0

3 years ago