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April 24th, 2013, 08:55 PM   #1
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(Int'l Finance) Compute NPV from project/parent's viewpoint

I am studying for my 3rd and final exam for my last semester of college and this problem is just giving me fits. I cannot seem to figure it out. Any help would be appreciated. And please show your work. Thanks!

Question: Evaluate the following project from both a local and the parent's viewpoint (that is, find the NPV of the project in terms of $ and , respectively).

1) The foreign project has a life of three years. The initial investment on long-term capital is $30m. The required (one-time) increase in working capital is $5m.
2) Annual revenue in each of the three years will be 3000m. Annual costs of goods sold will be 1000m.
3) Japan: beta = 2, risk-free rate (Rf) = 5%, expected rate of return (Rm) = 8%, before-tax cost of debt (Rd) = 6%, 40% debt and 60% equity;
U.S.: beta = 1.5, Rf = 3%, Rm = 10%, Rd = 5%, 40% debt and 60% equity.
4) Current spot rate: 100/$; Annual inflation rate in Japan is 4%; Annual inflation rate in the U.S. is 2%.
5) Corporate tax rate is 35%; straight-line depreciation method.
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