Question Details

There is currently no withholding tax on remittances 


1. How Country Risk Affects NPV. Monk, Inc. is considering a capital budgeting project in
Tunisia. The project requires an initial outlay of 1 million Tunisian dinar; the dinar is currently
valued at $.70. In the first and second years of operation, the project will generate 700,000 dinar in
each year. After two years, Monk will terminate the project, and the expected salvage value is
Chapter 16: Country Risk Analysis 287
300,000 dinar. Monk has assigned a discount rate of 12 percent to this project. The following
additional information is available:
• There is currently no withholding tax on remittances to the U.S., but there is a 20 percent
chance that the Tunisian government will impose a withholding tax of 10 percent beginning
next year.
• There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after
two years instead of the 300,000 dinar it expects.
• The value of the dinar is expected to remain unchanged over the next two years.
a. Determine the net present value (NPV) of the project in each of the four possible scenarios.
b. Determine the joint probability of each scenario.
c. Compute the expected NPV of the project and make a recommendation to Monk regarding its
feasibility.

2. How Country Risk Affects NPV. In the previous question, assume that instead of adjusting the
estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 percent
to 17 percent. Reevaluate the NPV of the project- expected scenario using this adjusted discount
rate.


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