Suppose a Firm Projects Cash Flows of $2

question 7

Multiple Choice

Suppose a firm projects cash flows of $2.5 million,$3 million,and $4 million for years 1,2,and 3,respectively,on an initial investment in Ecuador of $22 million.The firm projects a perpetuity of $5 million in years 4 and beyond.If the required return on this investment is 17%,how large does the probability of expropriation in year 5 have to be before the investment has a negative NPV? Expected compensation in the event of expropriation is $3 million.

• A)31%
• B)42%
• C)22%
• D)49%

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Definitions:

Certainty

A condition of being sure about something or having absolute conviction in the truth of facts, often considered in decision-making processes.

Sources Of Change

Various factors or entities that initiate or drive alterations within an organization, market, or environment, including technological advancements, market trends, or legislative changes.

Globalization

The process of interaction and integration among people, companies, and governments worldwide, often resulting in global economic policy and cultural exchange.

Mismanagement

The ineffective, inefficient, or detrimental handling of administrative and organizational tasks, often leading to adverse effects on the entity's operations.