Reference no: EM132211837
Question - 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 aftertwo 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.
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