Transport, a U

question 32

Multiple Choice

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