Question Details

Why would Carson use this approach rather than using the pegged exchange rate 



1. Capital Budgeting Analysis. A project in South Korea requires an initial investment of 2 billion
South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion
and 4 billion won in the two years of operation, respectively. The project has no salvage value.
The current value of the won is 1,100 won per U.S. dollar, and the value of the won is expected to
remain constant over the next two years.
a. What is the NPV of this project if the required rate of return is 13 percent?
b. Repeat the question, except assume that the value of the won is expected to be 1,200 won per
U.S. dollar after two years. Further assume that the funds are blocked and that the parent
company will only be able to remit them back to the U.S. in two years. How does this affect
the NPV of the project?
2. Accounting for Exchange Rate Risk. Carson Co. is considering a 10-year project in Hong Kong,
where the Hong Kong dollar is tied to the U.S. dollar. Carson Co. uses sensitivity analysis that
allows for alternative exchange rate scenarios. Why would Carson use this approach rather than using the pegged exchange rate as its exchange rate forecast in every year?




Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help