国际财务管理（英文版·原书第9版） 答案Solutions-Manual-第18章　国际资本预算

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CHAPTER18INTERNATIONALCAPITALBUDGETING

ANSWERS&SOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMS

QUESTIONS

1.Whyiscapitalbudgetinganalysissoimportanttothefirm?

Answer:Thefundamentalgoalofthefinancialmanageristomaximizeshareholderwealth.CapitalinvestmentswithpositiveNPVorAPVcontributetoshareholderwealth.Additionally,capitalinvestmentsgenerallyrepresentlargeexpendituresrelativetothevalueoftheentirefirm.Theseinvestmentsdeterminehowefficientlyandexpensivelythefirmwillproduceitsproduct.Consequently,capitalexpendituresdeterminethelong-runcompetitivepositionofthefirmintheproductmarketplace.

2.WhatistheintuitionbehindtheNPVcapitalbudgetingframework?

Answer:TheNPVframeworkisadiscountedcashflowtechnique.Themethodologycomparesthepresentvalueofallcashinflowsassociatedwiththeproposedprojectversusthepresentvalueofallprojectoutflows.Ifinflowsareenoughtocoveralloperatingcostsandfinancingcosts,theprojectaddswealthtoshareholders.

3.Discusswhatismeantbytheincrementalcashflowsofacapitalproject.

Answer:Incrementalcashflowsaredenotedbythechangeintotalfirmcashinflowsandcashoutflowsthatcanbetraceddirectlytotheprojectunderanalysis.

4.Discussthenatureoftheequationsequence,Equation18.2ato18.2f.

Answer:Theequationsequenceisapresentationofincrementalannualcashflowsassociatedwithacapitalexpenditure.Equation18.2apresentsthemostdetailedexpressionforcalculatingthesecashflows;itiscomposedofthreeterms.Equation18.2bshowsthatthesethreetermsare:i)incrementalnetprofitassociatedwiththeproject;ii)incrementaldepreciationallowance;and,iii)incrementalafter-taxinterestexpenseassociatedwiththeborrowingcapacitycreatedbytheproject.Note,theincremental“netprofit”isnotaccountingprofitbutrathernetcashactuallyavailableforshareholders.Equation18.2ccancelsouttheafter-taxinteresttermin18.2a,yieldingasimplerformula.Equation18.2dshowsthatthefirsttermin18.2cisgenerallycalledafter-taxnetoperatingincome.Equation18.2eyieldsyetacomputationallysimplerformulabycombiningthedepreciationtermsof18.2c.Equation18.2fshowsthatthefirsttermin18.2eisgenerallyreferredtoasafter-taxoperatingcashflow.

5.WhatmakestheAPVcapitalbudgetingframeworkusefulforanalyzingforeigncapitalexpenditures?

Answer:TheAPVframeworkisavalue-additivitytechnique.Becauseinternationalprojectsfrequentlyhavecashflowsnotencounteredindomesticprojects,theAPVtechniqueeasilyallowstheanalysttoaddtermstothemodelthatrepresentthespecialcashflows.

6.Relatetheconceptoflostsalestothedefinitionofincrementalcashflow.

Answer:Whenanewcapitalprojectisundertakenitmaycompetewithanexistingproject(s),causingtheoldproject(s)toexperiencealossinsalesrevenue.Fromanincrementalcashflowstandpoint,thenewproject’sincrementalrevenueisthetotalsalesrevenueassociatedwiththenewprojectminusthelostsalesrevenuefromtheoldproject(s).

7.Whatproblemscanenterintothecapitalbudgetinganalysisifprojectdebtisevaluatedinsteadoftheborrowingcapacitycreatedbytheproject?

Answer:Ifprojectdebtisgreater(less)thantheborrowingcapacitycreatedbythecapitalproject,andtaxshieldsontheactualnewdebtareusedintheanalysis,theAPVwillbeoverstated(understated)makingtheprojectunjustlyappearmore(less)attractivethanitactuallyis.

8.WhatisthenatureofaconcessionaryloanandhowisithandledintheAPVmodel?

Answer:Aconcessionaryloanisaloanofferedbyagovernmentalbodyatbelowthenormalmarketrateofinterestasanenticementforafirmtomakeacapitalinvestmentthatwilleconomicallybenefitthelender.ThebenefittotheMNCisthedifferencebetweenthefacevalueoftheconcessionaryloanconvertedintothehomecurrencyandthepresentvalueofthesimilarlyconvertedconcessionaryloanpaymentsdiscountedattheMNC’snormaldomesticborrowingrate.Theloanpaymentswillyieldapresentvaluelessthanthefaceamountoftheconcessionaryloanwhentheyarediscountedatthehighernormalrate.ThisdifferencerepresentsasubsidythehostcountryiswillingtoextendtotheMNCiftheinvestmentismade.ThebenefittotheMNCoftheconcessionaryloanishandledintheAPVmodelviaaseparateterm.

9.WhatistheintuitionofdiscountingthevariouscashflowsintheAPVmodelatspecificdiscountrates?

Answer:TheAPVmodelisavalue-additivitytechniquewheretotalvalueisdeterminedbythesumofthepresentvaluesoftheindividualcashinflowsandoutflows.Eachcashflowwillnotnecessarilyhavethesameamountofriskassociatedwithit.Toaccountforriskdifferencesintheanalysis,eachcashflowisdiscountedataratecommensuratewiththeinherentriskinessofthecashflow.

10.IntheModigliani-Millerequation,whyisthemarketvalueoftheleveredfirmgreaterthanthemarketvalueofanequivalentunleveredfirm?

Answer:Theleveredfirmhasagreatermarketvaluebecauselessmoneyistakenfromthefirmbythegovernmentintaxesduetotax-deductibleinterestpayments.Thus,thereismorecashleftforinvestorgroupsthanwhenthefirmisfinancedwithall-equityfunds.

11.Discussthedifferencebetweenperformingthecapitalbudgetinganalysisfromtheparentfirm’sperspectiveasopposedtothesubsidiary’sperspective.

Answer:Thegoalofthefinancialmanageroftheparentfirmistomaximizeitsshareholders’wealth.AcapitalprojectofasubsidiaryoftheparentmayhaveapositiveNPV(orAPV)fromthesubsidiary’sperspectiveyethaveanegativeNPV(orAPV)fromtheparent’sperspectiveifcertaincashflowscannotberepatriatedtotheparentbecauseofremittancerestrictionsbythehostcountry,orifthehomecurrencyisexpectedtoappreciatesubstantiallyoverthelifeoftheproject,yieldingunattractivecashflowswhenconvertedintothehomecurrencyoftheparent.Anyofthesereasonscouldresultintheprojectbeingunattractivetotheparentandtheparent’sstockholders.

12.Definetheconceptofarealoption.Discusssomeofthevariousrealoptionsafirmcanbeconfrontedwithwheninvestinginrealprojects.

Answer:ApositiveAPVprojectisacceptedundertheassumptionthatallfutureoperatingdecisionswillbeoptimal.Thefirm’smanagementdoesnotknowattheinceptiondateofaprojectwhatfuturedecisionsitwillbeconfrontedwithbecauseallinformationconcerningtheprojecthasnotyetbeenlearned.Consequently,thefirm’smanagementhasalternativepaths,oroptions,thatitcantakeasnewinformationisdiscovered.Theapplicationofoptionspricingtheorytotheevaluationofinvestmentoptionsinrealprojectsisknownasrealoptions.

Thefirmisconfrontedwithmanypossiblerealoptionsoverthelifeofacapitalasset.Forexample,thefirmmayhaveatimingoptionaswhentomaketheinvestment;itmayhaveagrowthoptiontoincreasethescaleoftheinvestment;itmayhaveasuspensionoptiontotemporarilyceaseproduction;and,itmayhaveanabandonmentoptiontoquittheinvestmentearly.

13.DiscussthecircumstancesunderwhichthecapitalexpenditureofaforeignsubsidiarymighthaveapositiveNPVinlocalcurrencytermsbutbeunprofitablefromtheparentfirm’sperspective.

Answer:TheprojectNPVmightbenegativefromtheparentfirm’sperspectivewhenitispositiveinlocalcurrencytermsifallforeigncashflowscannotbelegallyrepatriatedtotheparentfirm.Additionally,ifthePPPassumptiondoesnothold,suchthattheactualfuturerealexchangeratehasdepreciatedinforeigncurrencyterms,theafter-taxcashflowswillyieldlessunitsofhomecurrencyfromtheparentfirm’sperspectivethanexpected,possiblyresultinginanegativeNPV.

PROBLEMS

1.TheAlphaCompanyplanstoestablishasubsidiaryinHungarytomanufactureandsellfashionwristwatches.Alphahastotalassetsof$70million,ofwhich$45millionisequityfinanced.Theremainderisfinancedwithdebt.Alphaconsidereditscurrentcapitalstructureoptimal.TheconstructioncostoftheHungarianfacilityinforintsisestimatedatHUF2,400,000,000,ofwhichHUF1,800,000,and000istobefinancedatabelow-marketborrowingratearrangedbytheHungariangovernment.Alphawonderswhatamountofdebtitshoulduseincalculatingthetaxshieldsoninterestpaymentsinitscapitalbudgetinganalysis.Canyouofferassistance?

Solution:TheAlphaCompanyhasanoptimaldebtratioof.357(=$25milliondebt/$70millionassets)or35.7%.Theprojectdebtratiois.75(=HUF1,800/HUF2,400)or75%.Alphawilloverstatethetaxshieldoninterestpaymentsifitusesthe75%figurebecausetheproposedprojectwillonlyincreaseborrowingcapacitybyHUF856,800,000(=HUF2,400,000,000x.357).

2.ThecurrentspotexchangerateisHUF250/$1.00.Long-runinflationinHungaryisestimatedat10percentannuallyand3percentintheUnitedStates.IfPPPisexpectedtoholdbetweenthetwocountries,whatspotexchangeshouldoneforecastfiveyearsintothefuture?

Solution:HUF250(1+.10)5/(1+.03)5=HUF347.31/$1.00.

3.TheBetaCorporationhasanoptimaldebtratioof40percent.Itscostofequitycapitalis12percentanditsbefore-taxborrowingrateis8percent.Givenamarginaltaxrateof35percent,calculate(a)theweighted-averagecostofcapital,and(b)thecostofequityforanequivalentall-equityfinancedfirm.

Solution:

(a) K=(1-.40).12+(.40).08(1-.35)

=.0928or9.28%

(b) Aweighted-averagecostofcapitalof9.28%foraleveredfirmimplies:

K=.0928=Ku(1-(.35)(.40)).SolvingforKuyields.1079or10.79%.

4.Zeda,Inc.,aU.S.MNC,isconsideringmakingafixeddirectinvestmentinDenmark.TheDanishgovernmenthasofferedZedaaconcessionaryloanofDKK15,000,000atarateof4percentperannum.Thenormalborrowingrateis6percentindollarsand5.5percentinDanishkrone.Theloanschedulecallsfortheprincipaltoberepaidinthreeequalannualinstallments.Whatisthepresentvalueofthebenefitoftheconcessionaryloan?ThecurrentspotrateisDKK5.60/$1.00andtheexpectedinflationrateis3%intheU.S.and2.5%inDenmark.

Solution:

Year

(t)

St

(a)

Principal

Payment

(b)

DKK

It

(c)

DKK

StLPt

(b+c)/(a)

StLPt/(1+id)t

1

5.57

5,000,000

600,000

1,005,386

948,477

2

5.55

5,000,000

400,000

972,973

865,943

3

5.52

5,000,000

200,000

942,029

790,946

15,000,000

2,605,366

Thedollarvalueoftheconcessionaryloanis$2,678,574=DKK15,000,000÷5.60.Thedollarpresentvalueoftheconcessionaryloanpaymentsis$2,605,366.Therefore,thepresentvalueofthebenefitoftheconcessionaryloanis$73,208=$2,678,574–2,605,366.

5.DeltaCompany,aU.S.MNC,iscontemplatingmakingaforeigncapitalexpenditureinSouthAfrica.TheinitialcostoftheprojectisZAR10,000.TheannualcashflowsoverthefiveyeareconomiclifeoftheprojectinZARareestimatedtobe3,000,4,000,5,000,6000,and7,000.Theparentfirm’scostofcapitalindollarsis9.5percent.Long-runinflationisforecastedtobe3percentperannumintheU.S.and7percentinSouthAfrica.ThecurrentspotforeignexchangerateisZAR/USD=3.75.DeterminetheNPVfortheprojectinUSDby:

a.CalculatingtheNPVinZARusingtheZARequivalentcostofcapitalaccordingtotheFisherEffectandthenconvertingtoUSDatthecurrentspotrate.

Solution:ZARequivalentcostofcapitalaccordingtotheFisherEffect=1.095x[(1.07)/(1.03)]–1=.1375or13.75percent.

NPVUSD=[3,000/(1.1375)1+4,000/(1.1375)2+5,000/(1.1375)3+6,000/(1.1375)4

+7,000/(1.1375)5–10,000]/3.75=USD1,700

b.ConvertingallcashflowsfromZARtoUSDatPurchasingPowerParityforecastedexchangeratesandthencalculatingtheNPVatthedollarcostofcapital.

Solution:ThePPPforecastedZAR/USDexchangeratesare:

ZAR/USD(t)=3.75x[(1.07)/(1.03)]t

ZAR/USD(1)=3.90;ZAR/USD(2)=4.05;ZAR/USD(3)=4.20;ZAR/USD(4)=4.37;

and,ZAR/USD(5)=4.54.

NPVUSD=[(3,000/3.90)/(1.095)1+4,000/(4.05)/(1.095)2+5,000/(4.20)/(1.095)3

+6,000/(4.37)/(1.095)4+7,000/(4.54)/(1.095)5–10,000/(3.75)]=USD1,700

ArethetwodollarNPVsdifferentorthesame?Explain.

ThetwodollarNPVsareidenticalastheyalwayswillbeundertheassumptionthatbothPPPandtheFisherEffecthold.Note,thatbothparityconditionsincorporaterelativedifferencesininflation.

c.WhatistheNPVindollarsiftheactualpatternofZAR/USDexchangeratesis:S(0)=3.75,S(1)=5.7,S(2)=6.7,S(3)=7.2,S(4)=7.7,andS(5)=8.2?

Solution:

NPVUSD=[(3,000/5.7)/(1.095)1+4,000/(6.7)/(1.095)2+5,000/(7.2)/(1.095)3

+6,000/(7.7)/(1.095)4+7,000/(8.2)/(1.095)5–10,000/(3.75)]=–USD75.

TheNPVisnegativebecauseactualexchangeratesdidnotevolveasforecastedbyPPP.Consequently,actualNPVandforecastedNPVmaybedifferent.

6.SupposethatintheillustratedminicaseinthechaptertheAPVforCentraliahadbeen-$60,000.Howlargewouldtheafter-taxterminalvalueoftheprojectneedtobebeforetheAPVwouldbepositiveandCentraliawouldaccepttheproject?

Solution:CentraliashouldnotgoaheadwithitsplanstobuildamanufacturingplantintheSpainunlesstheterminalvalueislikelytobelargeenoughtoyieldapositiveAPV.Theterminalvalueoftheprojectmustbe$299,010inorderfortheAPVtoequalzero.Thisiscalculatedasfollows.Set

STTVT/(1+Kud)T=$60,000.Thisimplies

TVT=($60,000/ST)(1+Kud)T

=($60,000/.7261)(1.11)8

=€190,431.

7.WithregardstotheCentraliaillustratedminicaseinthechapter,howwouldtheAPVchangeif:

a.Theforecastofdand/orfareincorrect?

Answer:AlargerorsmallerdwillnothaveanyeffectbecauseachangewillaffectthenumeratoranddenominatorofeachAPVterminanoffsettingmanner.Notethatimbeddedineachdomesticdiscountrateistheinflationpremiumd.Alarger(smaller)f,however,willdecrease(increase)theprojectAPVbecausetheforeigncurrencyreceivedwillbuyless(more)parentcountrycurrencyuponrepatriation.

b.DeprecationcashflowsarediscountedatKudinsteadofid?

Answer:TheAPVwouldbelessfavorablebecauseKudisalargerdiscountratethanid.

c.Thehostcountrydidnotprovidetheconcessionaryloan?

Answer:TheAPVwouldbelessfavorablebecausetheprojectwouldhavetocoverahigherfinancecharge,i.e.,therewouldbenobenefitreceivedfrombelowmarketfinancing.

MINICASE:DORCHESTER,LTD.

DorchesterLtd.,isanold-lineconfectionerspecializinginhigh-qualitychocolates.ThroughitsfacilitiesintheUnitedKingdom,DorchestermanufacturescandiesthatitsellsthroughoutWesternEuropeandNorthAmerica(UnitedStatesandCanada).Withitscurrentmanufacturingfacilities,DorchesterhasbeenunabletosupplytheU.S.marketwithmorethan225,000poundsofcandyperyear.Thissupplyhasalloweditssalesaffiliate,locatedinBoston,tobeabletopenetratetheU.S.marketnofartherwestthanSt.LouisandonlyasfarsouthasAtlanta.DorchesterbelievesthataseparatemanufacturingfacilitylocatedintheUnitedStateswouldallowittosupplytheentireU.S.marketandCanada(whichpresentlyaccountsfor65,000poundsperyear).DorchestercurrentlyestimatesinitialdemandintheNorthAmericanmarketat390,000pounds,withgrowthata5percentannualrate.Aseparatemanufacturingfacilitywould,obviously,freeuptheamountcurrentlyshippedtotheUnitedStatesandCanada.ButDorchesterbelievesthatthisisonlyashort-runproblem.TheybelievetheeconomicdevelopmenttakingplaceinEasternEuropewillallowittoselltherethefullamountpresentlyshippedtoNorthAmericawithinaperiodoffiveyears.

Dorchesterpresentlyrealizes£3.00perpoundonitsNorthAmericanexports.OncetheU.S.manufacturingfacilityisoperating,Dorchesterexpectsthatitwillbeabletoinitiallypriceitsproductat$7.70perpound.Thispricewouldrepresentanoperatingprofitof$4.40perpound.BothsalespriceandoperatingcostsareexpectedtokeeptrackwiththeU.S.pricelevel;U.S.inflationisforecastatarateof3percentforthenextseveralyears.IntheU.K.,long-runinflationisexpectedtobeinthe4to5percentrange,dependingonwhicheconomicserviceonefollows.Thecurrentspotexchangerateis$1.50/£1.00.DorchesterexplicitlybelievesinPPPasthebestmeanstoforecastfutureexchangerates.

Themanufacturingfacilityisexpectedtocost$7,000,000.Dorchesterplanstofinancethisamountbyacombinationofequitycapitalanddebt.TheplantwillincreaseDorchester’sborrowingcapacityby£2,000,000,anditplanstoborrowonlythatamount.ThelocalcommunityinwhichDorchesterhasdecidedtobuildwillprovide$1,500,000ofdebtfinancingforaperiodofsevenyearsat7.75percent.Theprincipalistoberepaidinequalinstallmentsoverthelifeoftheloan.Atthispoint,DorchesterisuncertainwhethertoraisetheremainingdebtitdesiresthroughadomesticbondissueoraEurodollarbondissue.Itbelievesitcanborrowpoundssterlingat10.75percentperannumanddollarsat9.5percent.Dorchesterestimatesitsall-equitycostofcapitaltobe15percent.

TheU.S.InternalRevenueServicewillallowDorchestertodepreciatethenewfacilityoveraseven-yearperiod.Afterthattimetheconfectioneryequipment,whichaccountsforthebulkoftheinvestment,isexpectedtohavesubstantialmarketvalue.

Dorchesterdoesnotexpecttoreceiveanyspecialtaxconcessions.Further,becausethecorporatetaxratesinthetwocountriesarethesame--35percentintheU.K.andintheUnitedStates--transferpricingstrategiesareruledout.

ShouldDorchesterbuildthenewmanufacturingplantintheUnitedStates?

SuggestedSolutiontoDorchesterLtd.

SummaryofKeyInformation

ThecurrentexchangerateinEuropeantermsisSo(£/$)=1/1.50=.6667.

TheinitialcostoftheprojectinBritishpoundsisSoCo=£0.6667($7,000,000)=

£4,666,900.

TheU.K.inflationrateisestimatedat4.5%perannum,orthemid-pointofthe4%-5%range.TheU.S.inflationrateisforecastat3%perannum.UnderthesimplifyingassumptionthatPPPholds=.6667(1.045)t/(1.03)t.

Thebefore-taxnominalcontributionmarginperunitatt=1is$4.40(1.03)t-1.

ItisassumedthatDorchesterwillbeabletosellone-fifthofthe290,000poundsofcandyitpresentlysellstoNorthAmericainEasternEuropethefirstyearthenewmanufacturingfacilityisinoperation;two-fifthsthesecondyear;etc.;andall290,000poundsbeginningthefifthyear.

Thecontributionmarginonlostsalesperpoundinyeartequals£3.00(1.045)t.

Terminalvaluewillinitiallybeassumedtoequalzero.

Straightlinedepreciationoverthesevenyeareconomiclifeoftheprojectisassumed:Dt=$1,000,000=$7,000,000/7years.

Themarginaltaxrate,,istheU.K.(orU.S.)rateof35%.

Dorchesterwillborrow$1,500,000attheconcessionaryloanrateof7.75%perannum.Optimally,Dorchestershouldborrowtheremainingfundsitneeds,£1,000,000,inpoundssterlingbecauseaccordingtotheFisherequation,therealrateislessforborrowingpoundssterlingthanitisforborrowingdollars:

5.98%or.0598=(1.1075)/(1.045)-1.0versus

6.31%or.0631=(1.095)/(1.03)-1.0.

Kud=15%.

CalculationofthePresentValueoftheAfter-TaxOperatingCashFlows

Year

(t)

Quantity

xQuantity

x$4.40

x(1.03)t-1

Quantity

Lost

Sales

Quantity

LostSales

x£3.00

x(1.045)t

(a)

£

(b)

£

(a+b)

£

£

1

.6764

390,000

1,160,702

(232,000)

(727,320)

433,382

244,955

2

.6863

409,500

1,273,673

(174,000)

(570,037)

703,636

345,832

3

.6963

429,975

1,397,548

(116,000)

(397,126)

1,000,422

427,566

4

.7064

451,474

1,533,373

(58,000)

(207,498)

1,325,875

492,748

5

.7167

474,048

1,682,524

0

0

1,682,524

543,733

6

.7271

497,750

1,846,053

0

0

1,846,053

518,765

7

.7377

522,638

2,025,613

0

0

2,025,613

494,977

3,068,576

CalculationofthePresentValueoftheDepreciationTaxShields

Year

(t)

Dt

$

£

1

.6764

1,000,000

213,761

2

.6863

1,000,000

195,837

3

.6963

1,000,000

179,404

4

.7064

1,000,000

164,340

5

.7167

1,000,000

150,552

6

.7271

1,000,000

137,911

7

.7377

1,000,000

126,340

1,168,146

CalculationofthePresentValueoftheConcessionaryLoanPayments

Year

(t)

(a)

Principal

Payment

(b)

$

It

(c)

$

(a)x(b+c)

£

£

1

.6764

214,286

116,250

223,574

201,873

2

.6863

214,286

99,643

215,449

175,654

3

.6963

214,286

83,036

207,025

152,402

4

.7064

214,286

66,429

198,297

131,808

5

.7167

214,286

49,821

189,286

113,605

6

.7271

214,286

33,214

179,957

97,523

7

.7377

214,286

16,607

170,330

83,346

1,500,000

956,211

CalculationofthePresentValueoftheBenefitfromtheConcessionaryLoan

=£0.6667x$1,500,000-£956,211=£43,839

CalculationofthePresentValueoftheInterestTaxShields

fromthe$1,500,000ConcessionaryLoan

Year

(t)

(a)

It

(b)

$

(axbx)

£

£

1

.6764

116,250

27,521

24,850

2

.6863

99,643

23,935

19,514

3

.6963

83,036

20,236

14,897

4

.7064

66,429

16,424

10,917

5

.7167

49,821

12,497

7,501

6

.7271

33,214

8,452

4,581

7

.7377

16,607

4,288

2,098

84,357

CalculationofthePresentValueoftheInterestTaxShieldsfromthe£1,000,000BondIssue

Year

(t)

Outstanding

Loan

Balance

Principal

Payment

Interest

Payment

£

£

£

£

1

1,000,000

0

107,500

33,973

2

1,000,000

0

107,500

30,675

3

1,000,000

0

107,500

27,698

4

1,000,000

0

107,500

25,009

5

1,000,000

0

107,500

22,582

6

1,000,000

0

107,500

20,390

7

1,000,000

1,000,000

107,500

18,411

178,738

Withoutconsideringtheterminalvalueoftheproject,theAPVoftheprojectisnegative:

APV=£3,068,576+1,168,146+43,839+84,357+178,738-4,666,900=-£123,244.

DorchestershouldnotgoaheadwithitsplanstobuildamanufacturingplantintheU.S.unlesstheterminalvalueislikelytobelargeenoughtoyieldapositiveAPV.Theterminalvalueoftheprojectmustbe$444,397inorderfortheAPVtoequalzero.Thisiscalculatedasfollows.Set

STTVT/(1+Kud)T=£123,244.

Thisimplies

TVT=(£123,244/ST)(1+Kud)T

=(£123,244/.7377)(1.15)7

=$444,397.

Sincetheterminalvalueisexpectedtobesubstantial,andtheinitialcostoftheprojectis$7,000,000,itappearslikelythattheterminalvaluewillbesufficienttoyieldapositiveAPV.Thus,DorchestershouldgoaheadwithitsplanstobuildamanufacturingplantintheU.S.

MINI-CASE:Strik-it-RichGoldMiningCompany

TheStrik-it-RichG