Reference no: EM131300725
Engineering Finance. Please provide complete and correct solution done on computer or by hand with mathematical proof/explanation to all questions. Please, emphasis on complete and correct solution. The answers will be verified. This is all the information provided. Thank you very much.
The Bunsen Gas Company has just finished constructing a natural gas plant in, and for, the Republic of Frigideria.
The final payment of $2.5 million to Bunsen by the government will be made one year hence, after Bunsen trains the local people to operate the new plant.
However, there is a good chance (maybe 30 percent) of a coup d’etat, in which case it is highly unlikely that any new government would honor the previous government’s obligations. Rather than use the company’s usual 15 percent cost of capital, the management of Bunsen Gas Company decides to account for the risk of a coup d’etat by discounting the final payment at 45 percent.
a) What is the present value of the final payment, as determined by the management of Bunsen Gas Company, with this modified discount rate?
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