Exhibit 14-1
Assume That Baps Corporation Is Considering the Establishment

question 64

Multiple Choice

Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK) :
$\begin{array}{llcc}\underline{\text { Year 1 }} & \underline{\text { Year 2 }}& \underline{\text { Year 3 }}& \underline{\text { Year 4 }} \\\text { NOK10.000.000 }&\text { NOK15.000.000 }& \text { NOK17.000.000 }& \text { NOK20.000.000 }\\\end{array}$



The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below:
$$\frac { \text { Year 1 } } { \$ 13 } \quad \frac { \text { Year 2 } } { \$ 14 } \quad \frac { \text { Year 3 } } { \$ 12 } \quad \frac { \text { Year 4 } } { \$ .15 }$$
-Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is $____.

• A) 510,088.04
• B) 1,710,088
• C) 1,040,000
• D) none of the above

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Definitions:

Operating Profit Margin

A profitability ratio calculated as operating income divided by revenue, indicating the percentage of revenue that is left over after paying for variable costs of production.

Cost of Goods Sold

Expenses directly incurred from the production of a company's sold goods, involving the cost of labor and materials.

General and Administrative Costs

Expenses related to the day-to-day operations of a business that are not directly linked to production or sales.

Gross Profit Margin

A financial metric indicating the percentage of revenue that exceeds the cost of goods sold; it measures how efficiently a company uses its labor and supplies in production.