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International Finance and Capital Budgeting Analysis

1) An MNC is considering establishing a two year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?
A) about NZ$11 million.
B) about NZ$15 million.
C) about NZ$31 million.
D) about NZ$37 million.
E) about NZ$25 million.

2) Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to _______ over time, and if the interest rate in that country is relatively ______.
A) depreciate; low
B) appreciate; high
C) depreciate; high
D) appreciate; low

Solution Preview

1) An MNC is considering establishing a two year project in New Zealand with a $30 million initial investment.  The firm's cost of capital is 12%.  The required rate of return on this project is 18%.  The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value.  Assume no taxes, and a stable exchange rate of $.60 per NZ$ over the next two years.  All cash flows are remitted to the parent.  What is the ...

Solution Summary

The solution explains how to carry out a capital budgeting analysis in a multinational scenario. Calculations are provided in the attached Excel sheet.

$2.19