Question Details

Diversifying Away Country Risk



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.	Diversifying Away Country Risk. Why do you think that an MNC- strategy of diversifying projects interna¬tion¬ally could achieve low exposure to overall country risk?



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